• We anticipated Supermax to comply with current EMCO regulations and cease glove operations in the Klang Valley.

• We reduced our FY21-FY23f earnings by c.4-8% as we adjust lower utilisation rate due to longer-than-expected National Recovery Plan Phase 1, disruption in production for 2 weeks, as well as lower margin than expected.

• Downgrade to HOLD with lower TP of RM3.15 pegged at PER 11x and rolling over valuation to CY23F EPS to reflect the normalized earnings.

Gloves not considered as essential services during current EMCO

There is no news or announcement made by Supermax on temporary stoppage of its glove production facilities in EMCO areas. Nevertheless, we believe they will follow the lead of other glove manufacturers and comply with current EMCO requirements imposed by MKN. Assuming due compliance and as most of its production facilities are in Klang Valley, our calculation indicates that temporary closure for 2 weeks would affect its earnings by c.4%.

Gloves ASPs have peaked

Although we believe long-term glove consumption remains solid on the back of structural change in higher glove usage due to greater hygiene awareness, near to mid-term sentiment has taken a huge hit (inclusive of ESG concern and decline in ASP). The production shut down for 2 weeks will likely slow the slide in the glove’s price but we believe Supermax ASPs have already peaked in 1HCY21. Moving forward, ASP will gradually decline as glove buying urgency is anticipated to fade due to increasing percentage of global vaccinations and rising competition from existing and newcomers’ capacity. With a more balanced supply and demand, we believe Supermax’ OBM model will not be able to sustain its premium ASP in the market and margin is likely to decline by a larger quantum compare to its peers.

Downgrade to HOLD, new TP RM3.15

We cut our FY21-23f earnings by 4-8% as we adjust lower utilisation rate due to longer-than-expected National Recovery Plan Phase 1 (operate at 60% workforce capacity), disruption in production for 2 weeks, as well as lower ASP and margin. Hence, we have derived a lower TP of RM3.15, pegged at PER 11x (Supermax’s 10-years historical forward average) and rolled over valuation to CY23F EPS to reflect the normalized earnings moving forward. Downgrade to HOLD from BUY.

Source: BIMB Securities Research - 8 Jul 2021