• Stay NEUTRAL, new DCF-derived MYR1 TP from MYR0.85, 0% downside. 3QFY23 (Jun) core loss narrowed to MYR32m, bringing 9MFY23 core loss to MYR111.8m, accounting for 93% of our previous FY23F loss of MYR120m. The weaker-than-expected results were dragged by continued ASP softness, lower-than-expected volumes sold, and the Withhold Release Order (WRO) imposed by the US Customs & Border Protection. Our TP incorporates a 15% ESG discount, as Supermax Corp’s ESG score of 2.3 is below the country median.

• Results overview. SUCB reported 3QFY23 core net loss of MYR32m after excluding a one-off unrealised FX gain of MYR15m and an impairment loss of MYR23m resulting from the decommissioning of three older production plants. Positively, net loss narrowed QoQ thanks to improved capacity utilisation as demand improved during the quarter while economies of scale improved. The group declared a DPS of 3.5 sen.

• Costs. SUCB highlighted the high gas tariff, electricity costs, and imposition of minimum wages as the main reasons dragging profitability. That said, the recent correction in natural gas prices (YTD: -50%) should cushion against impacts from elevated electricity and labour costs in in 2H23 (taking into account a 6-month time lag from the correction of Brent crude in late 2022).

• Outlook. Management’s tone turned slightly positive during the quarter as it is currently working on replacing older production lines with newer high- efficiency ones – this should eventually lead to better operating efficiencies coupled with favourable cost outlook moving into 2H23. Meanwhile, the shorter customer stock replenishment period (one month vs pre-COVID- 19’s three months) due to ample supply available, particularly built up by the Chinese glove makers, could potentially erode Malaysian gloves makers’ near-term market share. Our call is anchored by improvements in market dynamics, which include: i) Collective cost pass-through initiated by local and regional peers, ii) natural gas price corrections (YTD: -50%), and iii) the disciplined approach in scaling back new capacity plans.

• Earnings adjustments. We forecast a FY23 core loss of MYR136m, which should translate to a narrow loss in 4QFY23. We raised our FY24 core earnings by 38% after taking into account an improvement in utilisation rate and a better ASP outlook moving forward.

• Maintain NEUTRAL with a higher MYR1 TP, which implies 1.1x FY24F P/BV against its pre-COVID-19 historical mean of 1.3x. Key risks: Higher- than-expected sales volumes, stronger-than-expected USD against the MYR, and lower-than-expected raw material prices.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 19 May 2023