• Although Supermax reported a decent performance for 9MFY21, as corePATAMI of RM2,911m was up by more than 20x, this came in below our expectation, but within consensus
• We believe that the miss was due to our having underestimated the duration of the production halt in February, which is estimated to be around 5-10% of the production volume for the quarter
• We are lowering our earnings forecast for FY21 by 7% to factor in the FY3Q performance and lowering our TP to RM7.40 while maintaining our BUY call

Underestimated the Production Halt

The flattish earnings qoq came as a negative surprise to us, as we had underestimated the impact of the production halt at SUCB’s factories due to the Covid19 outbreak, which resulted in revenue declining by 3.1% qoq. The increase in ASPs was not sufficient to compensate for this. Given that production has resumed, we are expecting overall sales volume to continue growing in 4QFY21E. SUCB has also added around 8% capacity recently. Nevertheless, the overall performance is still commendable, as 3QFY21 EBITDA at RM1.4bn is still significantly higher than the RM107m achieved a year ago.

Management Believes That ASPs Might Have Peaked

Interestingly, management’s guidance on ASP was different from its peers, as they believe that ASPs have peaked and have since fallen by around 15-25%. Management also guided that prices are likely to fall gradually as demand for spot orders has slowed, which we believe is due to the easing of cases in the US. We believe that not all glove makers are facing similar issues, as some glove makers are still selling below the market (peak) price, and hence there is still room for them to raise prices. We have already factored in a 5-10% decline in ASP by end of the year, and a 3-5% mom decline in ASP for 2022.

Maintain BUY With a Lower TP at RM7.40

We are lowering our EPS forecast for FY21 by 7% to factor in the performance for 3QFY21E. We are, however, pegging valuation to a lower PE multiple of 10.6x (at -1SD of historical average), which is lower than the previous 15.6x (at historical average), as investors remain sceptical on the ASP trend, and so lower our TP to RM7.40 (from RM10.90). Key downside risks are: 1) unexpected disruption to its production line, and 2) spike in volatility in the US$/RM. Reiterate BUY due to its undemanding valuation.

Source: Affin Hwang Research - 6 May 2021