• Not-Rated. Supermax incurred increased losses in 1HFY24, reporting a core LATAMI of RM63.2mn. This outcome is significantly below both our in-house and market expectations, due to lower ASPs amidst weak demand. 2QFY24 revenue decline 18.2% QoQ on the back of sluggish LBT of RM63.2mn, no thanks to weak demand and ASPs. We cut our FY24-FY26F earnings forecast by 80%-53% to RM7.3mn-65.5mn to account for lower ASPs and production capacity. Management expects no improvement in FY24 performance due to challenges stemming from high-priced overseas stocks and ongoing high material and utilities costs. Despite operational challenges, we foresee that Supermax's substantial cash reserves will support the business in the near term. We have a non-rated recommendation on the stock.

• Key Highlight. Persistent weak demand persists as many buyers continue to deplete their post-pandemic overstocked positions. Additionally, ASPs remain low due to intense competition, particularly from Chinese manufacturers capitalizing on low utility costs. Moreover, the group incurred higher forex losses (compared to forex gains during 1QFY24) and impairment charges for stocks during this quarter.

• Forecast. We cut our FY24-FY26F earnings forecast by 80%-53% to RM7.3mn- 65.5mn to account for lower ASPs and production capacity.

• Outlook. Management anticipates no substantial improvement in performance throughout the remainder FY24 due to the elevated volume of high-priced stocks in its overseas distribution centers. Besides, current and anticipated high material costs as well as utilities expenses are expected to persist, leading to a pressure on margins. We believe that the prospects for Supermax remain challenging at this juncture due to its high stockpiles, which are further impeding operational efficiency. However, we view that its substantial cash reserves will support its business in the near term. It is noteworthy that the group maintains a high cash-to-market cap ratio of 64%. Overall, we have a neutral view on the industry as the decommissioning of the production facility by the glove players is projected to ease the industry's oversupply situation, gradually moving the market toward a state of normalisation. Nonetheless, we are still cautious on the potential for prolonged oversupply due to capacity issues in China.

Source: BIMB Securities Research - 21 Feb 2024