SUPERMX’s 1HFY23 results disappointed on a double-whammy of weak sales volume and margins. Given depressed utilisation rate of only 50% across the industry, the soft earnings undertone is expected to remain in subsequent quarters. Hence, we now forecast a loss of RM172m for FY23 (instead of a profit). Our FY24F net profit is also cut by 73%. We keep our TP unchanged at RM0.70 and reiterate our UNDERPERFORM call.

SUPERMX registered a net loss of RM102m in 1HFY23, against our full year net profit forecast of RM87m and the full-year consensus net profit estimate of RM50m, respectively. The variance against our forecast came largely from weaker-than-expected sales volume and margins.

QoQ, 2QFY23 revenue fell 30%, weighed down by a lower ASP and sales volumes. Not helping either was the imposition of the Withhold Release Order (WRO) by US Customs and Border Protection (USCBP). It plunged to a loss of RM83m at the EBITDA level due to: (i) excess capacity leading to reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further decline in prices, (ii) the sale of high-priced inventory at falling market prices which could well mean that certain shipments were sold at a loss, and (iii) reduced economies of scale, particularly, poor cost absorption due to low plant utilisation rate. As a result, 2QFY23 register a loss of RM108m compared to a profit of RM6m in 1QFY23. No dividend was declared in this quarter as expected. YoY, 1HFY23 revenue fell 79% dragged down by lower ASP and volume sales. As a result, 1HFY23 registered a loss of RM102m.

Outlook. MARGMA projects 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399b pieces in 2022. It believes the supply-demand equilibrium may return in 6-9 months. However, we beg to differ, expecting the overcapacity situation to persist at least over the next two years. 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. Still, capacity is seen to expand further in 2023. We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. However, this will do little to ease the overcapacity situation as the global glove production capacity will grow by 16% to 595b pieces during the year as more capacity planned by incumbent and new players during the pandemic years—enticed by super-fat margins that had evaporated—finally come on-line. This will result in the excess capacity rising by 22% to 137b pieces from 112b pieces in 2022. The expanded overcapacity means low prices and depressed plant utilisation will likely persist in 2023. Not helping the already dire situation is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further decline in prices.

We now project FY23F net loss of RM172m (from a profit forecast previously) as we reduce our utilisation rate assumption to 45% from 55%. We cut our FY24F net profit by 73% as we reduce the utilisation rate assumption from 65% to 50% and EBITDA margin to 10% from 16%.

Reiterate UNDERPERFORM. Our TP remain unchanged at RM0.70 based on 0.4x FY24F BVPS, at a steep discount to the sector’s average of 1.7x charted during previous downturns in 2008-2011 and 2014-2015 as we believe the current downturn could be one of the deepest ever. We impute a 5% discount on the TP to reflect its 2-star ESG rating as appraised by us (see page 4). We are cautious on the stock due to the following factors: (i) glove oversupply seen persisting over the next two years due to massive capacity expansion leading to low prices and depressed plant utilisations, and (ii) ASP yet to bottom out.

Key risks to our recommendation include: (i) the industry turning the corner sooner on stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (ii) industry consolidation reducing competition among players, and (iii) epidemic and pandemic occurrences.

Source: Kenanga Research - 17 Feb 2023