• SELL, new MYR0.75 TP from MYR0.92, 27% downside. Supermax’s 9MFY22 (Jun) earnings are slightly below expectations, as the group continued to struggle amid the US Customs & Border Protection (CBP) ban and declining ASPs. With the Canadian Government also suspending glove purchases from the group, we expect its outlook to remain challenging, with lower volumes and ASPs. We note that Supermax is at risk of being excluded from the Security Commission’s list of shariah-compliant securities for breaching the cash ratio.

• 9MFY22 earnings slightly below expectations at 93% and 95% of our and Street’s full-year estimates. Earnings continue to come off the highs recorded a year ago, falling 97% YoY and 60% QoQ. Revenue also declined 22% QoQ (-79% YoY) as sales continued to be impacted by the Withhold Release Order (WRO) imposed by the CBP in Oct 2021. Combined with the current high operating costs, margins have fallen below pre-pandemic levels, with the EBITDA margin at 8.5% (vs 17.8% in 3QFY19). An interim DPS of 3 sen was declared for the quarter.

• Challenging prospects ahead. While we expect industry ASPs to stabilise in 2H22 – as prices return to near pre-pandemic levels and producers begin to pass on the cost increases to customers (as guided by other glove producers in their recent results announcements) – Supermax’s outlook remains murky due to the US CBP overhang and recent suspension of glove purchases from the group by the Canadian Government. This will likely result in Supermax under-pricing its products to increase competitiveness in other markets with ample supply.

• Updates on expansion plans. Supermax is building five glove manufacturing plants in Malaysia, which will add 22.25bn in new capacity, bringing the total to 48.42bn. Total capex for these new plants is MYR1.39bn, and the new plants will be ready for commissioning in stages, with progress depending on the availability of workers. The group also officially started the ground-breaking of the US plant on 18 May. To recap, we believe there will be attractive tax benefits associated with the investment in Texas, given the higher operating cost environment, but we have not imputed the venture into our forecasts pending further clarification.

• Maintain SELL with a lower TP. We trim our ascribed P/E to 12x from 13x on 2023F EPS (in line with its 5-year mean). We make no changes to our earnings forecasts, but highlight that the CBP ban and pricing pressures may continue to pose a downside risk to earnings for at least another 1-2 quarters. Our TP includes a 13% ESG discount as Supermax’s ESG score is below the country mean.

Source: RHB Research - 26 May 2022