SUPERMX’s will resume exporting and selling gloves to the US following the lifting of the ban by U.S. Customs and Border Protection (CBP). We are only mildly positive as this will not meaningfully improve the company’s prospects amidst a sector downturn due to massive over-capacity. We maintain our forecasts but raise our TP by 6% to RM0.85 (from RM0.80) largely to reflect an improved ESG rating. Maintain MARKET PERFORM.

CBP ban uplifted, sale to US to resume. SUPERMX is cleared and allowed to resume exporting and selling gloves to the US following modification of the Finding by U.S. Customs and Border Protection (CBP) effective 18 September 2023. CBP affirmed that disposable gloves made by SUPERMX in Malaysia factories (Supermax Glove Manufacturing, Maxter Glove Manufacturing Sdn. Bhd., and Maxwell Glove Manufacturing Bhd.) would be admissible at all U.S. ports of entry as of 18 September 2023 following the successful remediation of forced labour indicators within their supply chain. Recall, SUPERMX was served with a WRO by the US CBP in Oct 2021. We are mildly positive as the US accounts for 20% of the group’s sales volume. However, it will not meaningfully improve the prospects of the company amidst a sector downturn due to massive over-capacity.

Outlook. We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply. The group predicts a recovery sometime in late-2024. Nevertheless, we expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. MARGMA projects 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399b pieces in 2022. It believes the supply-demand equilibrium may return in 6-9 months. However, we beg to differ, expecting the overcapacity situation to persist at least over the next 12 months. We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. On the supply side, we have already factored in a reduction of 24b pieces of gloves in the system by end- FY23. This will result in an excess capacity of 112b pieces which is similar to CY22. Despite the improvement, the overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry for the remainder of 2023.

Forecasts. Maintained.

However, we raise our TP by 6% to RM0.85 (from RM0.80) largely to reflect the removal of a 5% ESG discount as we now rate SUPERMX’s ESG rating at 3 stars (vs. 2 stars previously) following the successful remediation of forced labour indicators within their supply chain (see Page 4). Our TP is based on 0.5x FY24F BVPS, at a steep discount to the sector’s average of 1.7x charted during previous downturns in 2008-2011 and 2014-2015 as we believe the current downturn could be one of the deepest ever. Reiterate MARKET PERFORM.

Key risks to our recommendation include: (i) lower-than-expected organic growth in global demand for gloves, (ii) persistent oversupply in the absence of significant industry consolidation, and (iii) rising labour and energy costs.

Source: Kenanga Research - 21 Sept 2023