• Overview. Supermax Corporation Berhad (Supermax) registered a net profit of  RM5.7mn during 1QFY23 which tumbled by 82.7% QoQ and 99.1% YoY.  Revenue, in the meantime, tanked by 17.4% QoQ and 83% YoY respectively. The disappointing results were dented by lower average selling price (ASP),  disappointing sales volume as well as higher operating costs.

• Key highlights. Supermax ASPs remained weak no thanks to intense competition especially from the Chinese makers amid current unexciting glove demand. Note that Chinese players are selling below USD20/1kpcs versus local players >USD20/1kpcs and hence, dampening demand. Besides that, sales order from Supermax were still adversely impacted by WRO imposed by USCBP  since October 2021. Moreover, Supermax overseas distribution remained at a loss given that they opted to sell their high-priced inventory at a low-priced.

• Against estimates: Inline. 1QFY23 net profit of RM5.7mn was below our and street expectation which accounted only 4.6% and 4.9% of full year forecast.

• Outlook. We anticipate no sign of recovery and expect a tough operating environment in FY23. We expect Supermax to deliver weak earnings in subsequent quarters given lower volume and ASPs. Margin could be eroded further following a jump in raw materials prices and higher minimum wages.

• Earnings revision. In view of lower-than-expected results, we cut our FY23F-FY24F earnings forecasts by 77.3% and 53.1% respectively to account for lower  ASP, sales volume as well as margin compression.

• Our call. Maintain a SELL call with a lower TP of RM0.60 (RM0.64 previously)  following our earnings adjustment. Our valuation is based on average sector 5- years historical forward PE of 20x CY24F EPS of 3.0 sen. We believe our valuation is justified given our expectations that ASP could decline further due to supply-demand imbalance, stiff competition from China makers as well as challenging operating environment.

Source: BIMB Securities Research - 23 Nov 2022