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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 26 Nov 2021, 10:08 AM

 

Supermax Corporation - Hit by CBP WRO

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In an announcement to Bursa Malaysia, SUPERMAX disclosed that its U.S. representatives are in touch with the U.S. Customs and Border Protection (CBP) to obtain more clarity and information on the Withhold Release Order (WRO) issued. Downgrade FY22E net profit by 13% after imputing lower ASP from USD42/1,000 to USD40/1,000 pieces. We cut our TP from RM2.35 to RM2.15 based on 11x FY23E EPS (at -0.5 SD below 5-year pre-COVID forward historical mean of 15x). The PER is lowered from 12x to 11x taking into consideration of downside risk to revenue from the CBP WRO. Maintain Market Perform.

US Customs detention order placed on SUPERMAX’s disposable gloves. In an announcement to Bursa Malaysia, SUPERMAX disclosed that its U.S. representatives are in touch with the U.S. CBP to obtain more clarity and information on the WRO issued and the required measures going forward. CBP issued a WRO against Supermax and its subsidiaries based on information that reasonably indicated their use of forced labour in manufacturing operations. CBP identified 10 of the International Labour Organization’s indicators of forced labour during its investigation. The group claimed that it had taken measures to meet the International Labour Organisation (ILO) standards on migrant workers since 2019 and hence were surprised that due consideration were not given for the corrective steps taken and improvements made to labour welfare. The group highlighted that it had on 11 October 2021 commissioned an independent international consulting firm to conduct an audit into the status of foreign workers in the Supermax Group’s manufacturing facilities focusing on the 11 ILO Forced Labour Indicators. The audit is currently ongoing. This latest development is negative to Supermax and is likely to impact its earnings considering that US commands premium ASP and accounts for approximately 20% of sales. The severity to earnings depends on i) how fast Supermax can replace loss of sales in the US; and ii) how long it takes for the group to resolve the issue. Note that it took almost a year for TOPGLOV to be cleared of the ban.

Outlook. The recent round of reporting season for glove makers suggested that the ASP trend is expected to soften faster than expected in subsequent quarters. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. From Top Glove’s 4QFY21 results briefing recently, we gathered that its ASPs have dropped faster than expected at 31% QoQ to USD48/1,000 pieces. We believe this signals acceleration in overall market ASP normalization. We are unable to quantify as to how low ASP will fall to; however, glove manufacturers are of the view that ASP is unlikely to go below pre-COVID pricing considering that the cost structure has risen amongst others including social compliance costs and the high nitrile feedstock cost compared to pre-COVID era. Net cash as at 30 June 2021 stood at RM3.5b or RM1.29/share.

Downgrade FY22E net profit by 13% after imputing lower ASP from USD42/1,000 to USD40/1,000 pieces. We maintain our FY23E earning forecast and ASP of USD28/1,000 pieces.

Maintain Market Perform. We cut our TP from RM2.35 to RM2.15 based on 11x FY23E EPS (at -0.5 SD below 5-year pre-COVID forward historical mean of 15x). The PER is lowered from 12x to 11x taking into consideration of downside risk to revenue from the CBP WRO. Since ASPs are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped.

Key risk to our call is lower-than-expected ASP.

Source: Kenanga Research - 22 Oct 2021

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