• Still SELL, new MYR0.62 TP (DCF) from MYR0.46, 23% downside. Supermax’s 2QFY23 (Jun) core losses widened to MYR53m (after excluding one-off unrealised FX gains), coming in significantly below our and Street’s expectations. The weaker-than-expected results were dragged by continued ASP softness, volumes sold, as well as the Withhold Release Order (WRO) imposed by the US Customs and Border Protection (USCBP). We incorporated an 11% ESG discount to our intrinsic value.

• Results overview. SUCB reported a 2QFY23 core net loss of MYR53m after excluding a one-off unrealised FX gain of MYR55.2m. The results were below our and consensus’ estimates, no thanks to continued weakness in glove ASPs (likely below USD20 per 1,000 pieces), sales continuing to be adversely impacted by the USCBP’s WRO, and industry sub-optimal utilisation amid lacklustre customer demand. No dividend was declared during the quarter.

• In terms of costs, SUCB blamed the high gas tariff and imposition of minimum wages as the main factors dragging profitability. That said, the recent correction in natural gas prices (YTD: -43%) is expected to cushion against the impact of elevated electricity and labour costs in 2H23 (taking into consideration the 6-month time lag from the correction of Brent crude prices in late 2022).

• Outlook. Based on our channel checks, glove distributors’ inventory levels remain largely unchanged at 4-6months. On the demand side, surgical glove sales within the North America region were relatively robust, offset by lacklustre performance in the exam/single-use and life science segments. Concurrently, industry peers are planning to decommission obsolete plants to streamline overall operating efficiency. Nevertheless, we think cost pass- through remains challenging in the near term, as clients still refuse to place bulk orders, and recent orders received were rather erratic. That said, the recent profit alert released by Chinese glove makers indicate losses in 4Q22 as a result of the persisting price war.

• Earnings adjustments. We forecast an FY23F core loss of MYR120m from a profit of MYR33m to account for lower effective capacity, lower utilisation rates, and a weaker USD.

• SELL with higher MYR0.62 TP after tweaking our DCF assumptions. Our TP implies 0.3x FY24F P/B, against its pre-COVID-19 historical mean of 1.6x. We think SUCB’s previous aggressive expansion plans and OBM business model (typically carries high fixed costs) could be detrimental to its efforts to streamline its cost. Key risks: Higher-than-expected sales volumes, stronger- than-expected USD/ MYR, and lower-than-expected raw material prices.

Source: RHB Research - 17 Feb 2023