SUPERMX’s FY23 net loss came in slightly narrower than expectations. However, the sector’s outlook remains bleak due to massive capacity. It predicts a recovery sometime in late-2024. We maintain our FY24F net profit but cut our TP by 17% to RM0.80 (from RM0.96). Maintain MARKET PERFORM.

SUPERMX’sFY23 net loss of RM149m came in slightly narrower thanour full-year net lossforecastof RM173m and the full-year consensus net loss estimate of RM161m. The variance against our forecast came largely from slightly stronger-than-expected sales volume in 4Q.

QoQ, its4QFY23 revenue rose 27%thanks to a higher sales volume. It registeredaminiscule EBITDA of RM4m (vs. a EBITDA loss of RM53m in 3QFY23) due to:(i) still high natural gas price despite a decline (-16%), and (ii) poor economies of scale/cost absorption as its utilisation rate had yet to significantly improve.As a result, its 4QFY24 losses shrank to RM7m compared to RM40m in 4QFY23.

No dividend was declared in this quarter which came in within our expectation. YoY, FY23 revenue fell 69% dragged down by lower ASP and volume sales. As a result, FY23 registered a loss of RM149m.

Outlook. We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply. Nevertheless, we expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants. 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. 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 12 months. We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. On the supply side, we have already factored in a reduction of 24b pieces (previous reduction was 21b pieces) of gloves in the system by end FY23. This will result in an excess capacity of 112b pieces (instead of rising by 4% or 116b as previously forecast) which is similar to CY22. Despite the improvement, the overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry for the remainder of 2023.

Forecasts. We maintain our FY24F net profit and introduce our FY25F numbers.

However, we cut our TP from RM0.96 to RM0.80 based on 0.5x FY24F BVPS (previously 0.6x), 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).Reiterate MARKET PERFORM.

Key risks to our recommendation include: (i) lower-than-expected organic growth in global demand for gloves, (ii) persistent oversupply in the absence of significant industry consolidation, and (iii) rising labour and energy costs.

Source: Kenanga Research - 30 Aug 2023