KUALA LUMPUR: Affin Hwang Capital has lowered Supermax Corp Bhd's earning per share (EPS) forecast for financial years 2022 (FY22) to FY24 to factor in potential lower margins.
This is given the recent increase in production cost, and increases in both natural gas and electricity tariffs.
Affin Hwang believes that Supermax will have a challenging time to pass on the higher cost, given that its access to the United States (US) market is still restricted due to social compliance issues.
"Apart from the rising production cost, the current average selling price (ASP) is also still on a declining trend, due to normalising demand and increase of capacity from new suppliers.
"We are only expecting margins to stabilise by the end of 2022. Hence, there could still be downside risk to our earnings forecasts, if the momentum of the decline in ASP is steeper than our forecast," it said.
Meanwhile, Affin Hwang said based on its latest financial statement, Supermax has cash of around RM3.3 billion, which was larger than its current market capitalisation of around RM3.0 billion.
As such, the firm said some might argue that the stock is undervalued.
"However, we think otherwise as there is limited free cash flow available after factoring in Supermax's commitment to build a production base in the US, where Phase 1 of the project is likely to cost around RM1.4 billion (US$350 million)," it said.
The firm said apart from the capex, the overall tax and dividend payable was around RM350 million.
"Unless Supermax decides to abandon its plan to expand into the US, which we believe is unlikely, the cash available for distribution only constitutes 47 per cent of its current market, and not the headline 104 per cent," it said.
In a blue-sky scenario, Affin Hwang is valuing Supermax at 16 times price earning ratio (PER) instead of six times PER.
Coupled with the cash available for distribution, a higher fair value of RM1.55 is derived.
But, the firm believes this is unlikely due to its ongoing environmental and social governance (ESG) concerns.
"We reiterate Sell on the stock with target price of 95 sen, due to ongoing concerns on social compliance issues coupled with the uncertainty on when ASP would bottom out," it added.