SUPERMX’s FY22 earnings beat our forecast by 17% but are in line with consensus estimate. We maintain our FY23F numbers as its prospects will remain weak with ASP having yet to bottom out. We introduce FY24F numbers that reflect a continued downtrend in earnings. We believe the oversupply situation in the industry will persist at least over the next 2-3 years. We trim our TP by 5% to RM0.62 (from RM0.65) after imputing a 5% ESG discount. Reiterate UNDERPERFORM.

Its FY22 earnings beat our forecast by 17% but are in line with consensus estimates.

YoY, FY22 revenue fell 63%, weighed down by a lower ASP and sales volumes. Not helping either were the imposition of the Withhold Release Order (WRO) by US Customs and Border Protection (USCBP) and freezing of orders from the Canadian government. Net profit fell by a larger 88% due to: (i) the sale of high-priced inventory at falling market prices which could well mean that certain shipments were sold at a loss, (ii) ASP that fell faster than the decline in input cost, and (iii) a higher effective tax rate of 28% compared to 22% in FY21. A final dividend of 3.0 sen was declared in this quarter bringing FY22 dividend to 11.0 sen which came in line with our expectation.

Outlook. We expect ASP to remain in the doldrums in 2H 2022. As a result of the massive capacity expansion by incumbent players as well as new players jumping onto the bandwagon during the pandemic years — enticed by the then super fat margins that had eventually evaporated — we estimate that the global glove manufacturing capacity has jumped by 22% to 511b pieces in 2022 (see chart on the following page). On the other hand, as more countries come out the other end of the pandemic, we project the global demand for gloves to ease by 10% in 2022 to 387b pieces (partly also due to the destocking activities along the distribution network). This will result in an excess supply of 124b pieces (assuming, hypothetically, capacity utilisation is maximised). In 2023, we estimate that the global glove manufacturing capacity will surge by another 16% to 595b pieces (as more capacity planned during the pandemic years finally comes on-line) while the global demand for gloves shall resume its organic growth of 15% annually (taking our cue from MARGMA’s projection of 10-15% growth in global glove demand yearly), resulting in the excess supply ballooning further to 150b pieces. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

Reiterate UP. We downgrade our TP by 5% to RM0.62 (from RM0.65) based on 13x FY23F EPS after imputing a 5% discount to reflect its 2- star ESG rating as appraised by us (see Page 3).

Key risks to our recommendation: (i) stronger-than-expected growth in demand for gloves as health awareness rises faster globally, (ii) epidemic and pandemic occurrences, and (iii) a sharp fall in input cost.

Source: Kenanga Research - 23 Aug 2022