9MFY21 PATAMI of RM2,854m (+23-fold YoY) came in below expectations at 71%/70% of our/consensus full-year forecasts. The negative variance to our estimate is due to lower-than- expected ASP. Hence, we downgrade FY21E/FY22E net profit by 6%/6%. Following the roll-out of Covid-19 vaccines which is likely to cause glove demand to moderate, the group highlighted that global glove prices had since dropped by 15% to 25%. However, the group does not expect glove ASPs to drop sharply due to the structural change in glove consumption from new customer segments. Our TP is downgraded from RM7.80 to RM6.80 based on 11x CY22E revised EPS of 61.9 sen. Reiterate OP.

Key results’ highlights. QoQ, 3QFY21 revenue fell 3%, no thanks to lower volumes sales despite higher ASP as a result of production loss arising from temporary closure of Meru plants due to the pandemic. EBITDA margin fell 0.4ppt to 70.4% from 70.8% due to a combination of high raw material nitrile cost and one-time donation to the Government (RM75m). This brings 3QFY21 PATAMI to RM1,005m (-5%) due to higher effective tax rate of 24% compared to 23% in 2QFY21. A 2nd interim DPS of 13.0 sen was proposed bringing 9MFY21 DPS to 16.8 sen which came in line with our expectation. YoY, 9MFY21 PATAMI rose 23-fold to RM2,854m due to revenue growth (+340%), boosted by higher ASP.

Key points to highlight in 3QFY21 results note. The group highlighted in the quarterly result note that global glove prices have since dropped by 15% to 25% following the rollout of Covid-19 vaccines which is likely to cause glove demand to moderate. However, the group does not expect glove ASPs to drop sharply due to the structural change in glove consumption from new customer segments. Looking forward, we are concerned of execution risk in its overseas venture. According to Malaysian Rubber Glove Manufacturers Association, the global shortage of rubber gloves will last beyond 1Q 2022 with growth rate averaging between 15% and 20% per annum going forward with still high lead time averaging 6-8 months though lower compared to 12-14 months previously. The lead times suggest that CY22 demand will remain strong. To recap, Supermax is venturing into the US to manufacture medical gloves and other personal protective equipment (PPE) with an initial capital outlay of USD100m (RM405m). Closer to home, Plant 12 comprising Block A and Block B (total 4.4b pieces) have been completed following the commissioning of Block B in 2QFY21, adding 2.2b pieces, elevating total installed capacity to 26.2b (+13.4%). It is concurrently building five glove manufacturing plants, scheduled for completion progressively between now and 2022 which will add 22.3b pieces in new capacity and raising total capacity to 48b pieces by end-2022.

Downgrade FY21E/FY22E net profit by 6%/6% after imputing slightly lower ASP from USD70/1,000 and USD50/1,000 pieces to USD68/1,000 pieces and USD48/1000 pieces, respectively.

Reiterate OP. Correspondingly, we downgrade our TP from RM7.80 to RM6.80 based on 11x CY22E revised EPS of 61.9 sen (previously 12x) (5-year forward historical mean). We reduce PER from 12x to 11x to account for a 10% operating risk discount. In our view, from the perspective of a long-term investor, we still see significant value in Malaysian glove players which command 65-68% of global market share and have consistently evolve and innovate in terms of products and plant modernization via automations.

Key risks to our call include: (i) lower ASP occurring sooner than expected and (ii) faster-than-expected global vaccine roll-outs.

Source: Kenanga Research - 6 May 2021