Kenanga Research & Investment

Supermax Corporation - A Small Loss in 1QFY24

Publish date: Thu, 30 Nov 2023, 10:23 AM

SUPERMX’s 1QFY24 results met expectations. It reported a small net loss of RM2.1m but should turn profitable in the coming quarters on lower input costs. Nonetheless, the sector’s outlook remains bleak due to massive overcapacity. We maintain our forecasts and TP of RM0.85 but downgrade our call to UNDERPERFORM from MARKET PERFORM after the recent run-up in its share price.

SUPERMX’s 1QFY24 registered a net loss of RM2.1m compared to our full-year net profit forecast of RM26m and the full-year consensus net profit ofR M32m, respectively. We consider the results within expectations as we expect it to turn profitable in coming quarter on lower input costs.

QoQ, its 1QFY24 revenue fell 20%, no thanks to a lower sales volume. However, EBITDA widened to RM22m compared to RM4m in 4QFY23 albeit from a low base effect and also due to, we believe, lower natural gas price (-8%) and input raw material prices (-15%) as its utilisation rate had yet to significantly improve. As a result, its 1QFY24 losses narrowed to RM2m compared to RM7m in 4QFY23. YoY, 1QFY24 topline fell 28% due to lower ASP and volume sales. As a result, 1QFY24 registered a loss of RM2m compared to a profit of RM5.7m due to lower overhead absorption on the back of less than optimum utilisation rate. No dividend was declared in this quarter which came in within our expectation.

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. This will result in an excess capacity of 112b pieces 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. Maintained

We also keep our TP of RM0.85 based on 0.5x FY24FBVPS, at 70% discount to the sector’s average of 1.7x charted during previous downturns in 2008−2011 and 2014−2015. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 3). Downgrade to UNDERPERFORM from MARKET PERFORM as valuations have become rich after the recent run-up in its share price.

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 Nov 2023

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