Kenanga Research & Investment

Supermax Corporation - A Second Consecutive Quarterly Loss

Publish date: Fri, 19 May 2023, 09:53 AM

SUPERMX’s 9MFY23 net loss came in within our expectation but  was significantly wider than the consensus loss estimate. We expect  the sector to continue to face a challenging and competitive business  landscape ahead due to elevated costs, subdued selling prices and  massive capacity leading to suppressed plant utilisation. With no  reversal of fortunes in sight, we maintain our FY24F net loss, TP of  RM0.70 and UNDERPERFORM call.

SUPERMX registered a net loss of RM142m for 9MFY23, against our full-year net loss forecast of RM172m and the full-year consensus net  loss estimate of RM154m. We consider the result to be within our  expectation but significantly wider than market expectation.

QoQ, 3QFY23 revenue fell 1%, which we believe was weighed down by  a lower ASP but higher sales volumes. It plunged to a narrower loss of  RM53m compared to RM83m in 2QFY23 at the EBITDA level due to: (i)  unrealised forex gain (RM15m) from a loss (RM55m) in 2QFY23, (ii) margin erosion as costs remain elevated including natural gas and  electricity tariff, and labour costs against falling selling prices, and (iii)  reduced economies of scale, particularly, poor cost absorption, as its  utilisation rate continued to remain weak. As a result, 3QFY23 register a  loss of RM40m compared to RM108m in 2QFY23. A DPS of 3.5 sen was  declared which came in above our expectation. YoY, 9MFY23 revenue  fell 75% dragged down by lower ASP and volume sales. As a result,  9MFY23 registered a loss of RM142m.

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.

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).

Source: Kenanga Research - 19 May 2023

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