OSK Research has maintained its buy recommendation on Supermax Corporation Bhd at 87.5 sen with a target price of RM1.62, and said the company had indicated that it would continue to focus on original brand manufacturing (OBM) gloves for which margins were higher.

It said the company also expected the latex price to stabilise at around RM4.50 for 2009, and that this would be a fair price for rubber tappers to earn a reasonable margin.

The price is not expected to go up a lot given the low crude oil price (natural latex rubber price is co-related to the price of synthetic rubber, which is affected by crude oil price), and there may be an oversupply of latex given the lower demand from the automotive industry, it said.

OSK Research said the present breakdown for OBM and original equipment manufacturing (OEM) was 55%:45%, respectively.

“Going forward, management will increase production of OBM gloves as these yield better margins, and more controllable selling price since there is less competition and they are not squeezed by the OEMs in the healthcare industry,” it said.

The research house said Supermax has plans to set up new factories in Bukit Kapar, Klang starting 2011, in addition to the existing capacity expansion of 12 lines, or 1.8 billion gloves annually by 2010.

“Management plans to progressively transfer all its rubber glove production to this area to enhance operating efficiency. This ‘city’ would have its own independent electricity generator, together with a mix of natural gas and biofuel facilities.

“We understand that the first phase starting sometime in 2011 would involve replacing the older production capacity while the second phase — expected to start from 2012 — would involve factory relocation,” it said.

Meanwhile, commenting on APL Industries Bhd (APLI), OSK Research said the company had ceased rubber glove production since last December, and liquidators had been appointed to sell its remaining assets, such as its production lines and factory.

“There is no impact on Supermax since it had fully written down its 14.09% stake in APLI in 4QFY08 amounting to RM16.7 million. Management has also indicated that it has no interest in buying APLI’s assets. Instead, it prefers to focus on organic growth,” the research house said.

It nevertheless tweaked its FY09-FY10 earnings for Supermax downwards by 6%-15%, adding that its revised target price for Supermax was based on a price earnings ratio of six times FY10 earnings.

The company’s valuation is attractive at the current price and is trading at 3.7 times FY09 EPS (earnings per share) compared to its peers — Top Glove Corporation Bhd at 11.7 times, Kossan Rubber Industries Bhd 7.1 times, Hartalega Holdings Bhd 6.9 times and Adventa Bhd 5.4 times.

This article appeared in The Edge Financial Daily, March 10, 2009.