• Upgrade to NEUTRAL with new MYR0.88TP from MYR0.62, 3% downside. We expect the recent improvements in the market sentiment as well as a robust balance sheet to bode well for Supermax Corp. Industry peers (including Chinese makers) are believed to have engaged in cost pass-through initiatives. With a better 2H23 cost outlook, we upgrade our call. Our TP incorporates 11% ESG discount, as SUCB’s ESG score stands below the country median.

• ASP. Industry-blended ASP moderated slightly to USD20-21/1,000 pieces from c.USD20-22 in the previous quarter. The ASP decline’s pace was a low single-digits, which suggests it may have bottomed. According to our channel check, Blue Sail Medical recently revised its ASP to USD15-20 from USD14-15. We also observed other domestic glove makers engaging in costs pass-throughs, as Hartalega (HART MK, NEUTRAL TP: MYR2.11) raised ASPs twice this year while Top Glove (TOPG MK, NEUTRAL, TP: MYR1) raised it in Oct 2022.

• Demand. There was a one-off uptick in client order in Dec 2022 due to the National Health Service tender by the UK Government. The recent received orders were rather patchy as the clients are still reluctant to place bulky orders. Malaysian rubber glove exports tumbled 14% MoM to 39,479.6 tonnes in January following an 11% spike in Dec 2022. Industry players are still unable to ascertain the timing of the glove distributors’ destocking activities. We believe that such distributors are expecting inventory levels to deplete over the next six months.

• Supply. Post Dec 2022 results, we keep our FY22 industry supply assumptions unchanged – taking into consideration that new capacity was not added. We lower our FY23 industry supply assumptions to 397bn from 430bn, assuming glove-makers phase out obsolete production lines. Taking into account the current low industry utilisation rate of 30-40%, we expect the disciplined approach in commissioning new production lines to provide a temporary cushion to the glove makers’ profitability.

• Earnings revision and valuation. We maintain our earnings estimates but lower our weighted average cost of capital assumption to 8%, from 11% (we trim Beta and equity risk premium to 0.9 and 9% from 1.0 and 11%) in view of a more balance risk reward outlook. Despite a recent rally, SUCB still trades at -2SD P/BV, below its pre-COVID-19 historical mean (ex-cash P/BV is at -1SD). The company had the highest net cash among the Top 4 glove makers (on par with its market cap).

• Key risks. Uncertainties over gloves ASP, capacity expansions, utilisation rates, and raw material prices.

Source: RHB Research - 27 Mar 2023