When should you take money off the stock?
In a recent note last month dated 2 June 2020, research house CGS-CIMB Research has highlighted that Supermax (SUCB) had indicated that its order lead time has lengthened to Jun 2021 (end-FY6/21), which is 12 months (vs. Its previous assumption of 10 months).
This is on the back of favourable supply-demand dynamics in the glove sector, owing to Covid-19. The research house is also confident that SUCB is confident of raising its ASPs by 10% each month from Jun till Dec 2020, vs. its previous expectation of a 10% monthly increase from Jun to Sep 2020.
In fact, it was stated that in order to ensure no cancellation of orders, SUCB is requesting that its customers pay deposits (30-50%) in advance to lock in their orders. This is particularly for orders from non-recurring customers and/or spot buyers.
CGS-CIMB estimates that up to 15-20% of SUCB’s capacity mainly caters to spot (ad-hoc) orders (mainly from government and non-government organisations), which typically have higher selling prices (premium of 30-70%) vs. recurring orders, resulting in higher margins for SUCB.
Meanwhile, the research house also wrote that since the Covid-19 outbreak (Mar 20), SUCB has been selling more gloves under its original brand manufacturing (OBM) at 95% of its total sales volume vs. 70% pre-Covid-19.
This is via its own distribution centres (7 glove distribution centres globally – 55%) as well as via third-party distributors (40%). In our view, this manufacturing-cum-distribution model (focusing on selling OBM gloves) allows SUCB to garner higher margins and better pricing power as it is able to sell directly to end-customers.
For the upcoming 4QFY6/20 results, the research house expects SUCB to record sequentially stronger earnings of RM130m-135m. It also believes that the company’s sequential results will remain strong up to 2QFY6/21.
With a longer order book visibility and factoring in higher ASPs (current assumption of a 10% monthly increase in 1HFY21 from only 1QFY21 previously), the research house has raised its FY21-22F EPS for the stock by 33.3-38.7%. It has also raised the target price for the stock to RM9.80 (28x CY21 P/E).
CGS-CIMB Research said it continued to like SUCB for its attractive valuations (35.1% discount to the Malaysian glove sector average CY21F P/E of 35.1x) and OBM business model, which allows it to garner better margins vs. its peers given the current strong surge in glove demand.
PEG Corporate Finance and Research view:
Similar to Top Glove and other rubber glove players, trading-wise, it has been reported that the valuations of glove players on Bursa Malaysia are now quite stretched and may have priced in the potential strong rise in their earnings over the next year.
The strong rise in the share prices could also mean higher risk for traders or investors attempting to take a position in these stocks at this juncture.
Yet, for elite traders, rubber glove counters remained one of the best sectors to trade right now given its thematic theme being in favour now as well as the volatility in the sector.
So how should you trade Supermax despite knowing that it has risen strongly?
Or should you re-renter and continue to ride the stock uptrend? Or should you avoid the stock completely?
As an elite trader, you should not fear re-entering a stock just because it has gone up much. What you know is to know in advance the correct re-entry level, the optimum stop loss then upon re-entry and the correct position sizing to re-enter.
Using our calculated proprietary algorithm, the answer is not too hard. Based on the level highlighted a few days back, elite traders should have already re-entered rubber glove stocks at the following key levels highlighted then:
These key levels are calculated in advance and elite traders only need to monitor to see whether these levels are breached to initiate their trading action. As for Supermax, the level to re-enter as highlighted in the table above is RM7.10.
Elite traders only simply need to buy at the earliest one or two bids above RM7.10 (RM7.20) to immediately re-enter the stock and set an optimum stop loss to address the risk of the position.
Similar to Top Glove and other rubber glove players, the next key question is when should you take profit now on SuperMax after getting in early on re-entry and what is the optimum stop loss level to protect your position.
The key levels are given below for all main rubber glove stocks:
In short, do not over-complicate your trading and you should spend more time on your trade management rather than over-thinking and over-analysing.
In fact, we seldom rely on more than a few critical levels to manage our position using our proprietary trading algorithm. That’s what elite traders do with utmost confidence and comfort.
We suggest you do the same if you want to elevate your trading to the highest level. Do not always second-guess yourself by getting conflicting information from all over the place.
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