Labour Issue Hampers Growth

Supermax (SUCB) reported a surprisingly weak set of 1QFY20 numbers. PATAMI of RM24.7m (+64.3% qoq; -21.4% yoy) fell short of both consensus and our forecasts, merely accounting for 17% of the forecasts. We believe that SUCB will be able to pass on the higher cost in the coming quarters to overcome the margin issue in 1QFY20, but the labour shortage issue which impacted the whole industry may need a longer time to be resolved. As such, we lower our EPS forecasts for FY20-22 by 11-12% and cut our 12-month TP to RM1.70. We reiterate our BUY call.

Better Quarters Ahead

SUCB’s margin was impacted by higher production costs during the quarter, mainly due to the natural gas price hike in July. SUCB has already started passing on the higher cost to its customers as demand improves. We are expecting some margin improvement in the coming quarters. The US imposed a 15% tariff hike on Chinese medical gloves in Sept. SUCB has indicated that it still has a backlog of orders and will continue with its expansion plan. SUCB has already successfully commissioned 3 out of the 8 lines of the new Plant #12.

Labour Shortage Reduces Efficiency

SUCB’s management has also indicated that it is facing a labour shortage with the need for more workers given the hard cap on overtime. SUCB is also engaging a new recruitment agency to help resolve the issue, as new workers have to be free of any bond-related debts. We believe that SUCB and the other rubber glove makers are taking a more cautious approach to the matter, as WRP Asia Pacific (a glove manufacturer in Malaysia) was recently put on the import ban list by the US Custom and Border Protection agency for using forced labour.

Maintain BUY With a Lower TP of RM1.70

We have lowered our FY20-22E EPS by 11%-12% to factor in the lower profitability of the current quarter, and the impact of the labour shortage. We have cut our TP to RM1.70 based on an unchanged PER target of 18x on CY20E EPS. Nonetheless, we keep our BUY rating on the 20% upside potential. Downside risks: i) a sharp spike in the volatility of the RM/US$; and ii) higher-than-expected production costs.

Source: Affin Hwang Research - 29 Nov 2019