• Overview. Supermax’s 2QFY22 net profit decreased to RM47.8m (- 92.5% qoq, -95.5% yoy) due to lower ASPs and sales volume. Volume decrease was mostly attributed to US CBP WRO and freezing of orders by Canada’s Federal Government. Additionally, effective tax rate was higher at 38.4% as higher provision was made in view of the prosperity tax. Profit margin dropped to 9.1% (-34.7ppts qoq, -43.9ppts yoy).

• Key highlights. Supermax ASPs are expected to drop further in coming quarters in tandem with fall in market ASPs (around US$25-27 by end 1Q2022). Canadian government has on 18th January 2022, terminated two contracts with Supermax (mutual consent). We believe this has a negative earnings impact moving forward as Supermax’s sales to Canada represent c.9% of total revenue.

• Against estimates: Below. 1HFY22 net profit fell 62.9% to RM686.4m (accounting for 68%/61% of our/consensus FY22f) and is considered below our/consensus FY22 forecast due to lower-than-expected sales volume and ASPs.

• Outlook. Tough operating conditions are likely to persist in 2022. We expect Supermax to deliver weaker earnings in subsequent quarters on overall lower volume and ASPs. Margin could further erode due to higher operating and social compliance cost as well as one-off prosperity tax.

• Earnings revision. We revised down our FY22-24f earnings by 27-60% to account for lower sales volume and decline in ASPs. Our ASP assumptions for FY22f/23f/24f now stand at US$37/US$25/US$24.6 per 1k pcs.

• Our call. In tandem with earnings revision, we have derived a lower TP of RM0.80 (from RM1.70) based on unchanged PER 11x pegged on CY23F EPS of 7.2 sen. Downgrade to SELL as we believe current valuations have not accounted for sharper decline in FY22-24F earnings and ongoing ESG concerns.

Source: BIMB Securities Research - 23 Feb 2022