• Still SELL, new MYR0.46 TP (DCF) from MYR0.50, 50% downside. Supermax delivered a 1QFY23 (Jun) core loss of MYR27m (after excluding an unrealised FX gain), way below our and Street’s expectations. The weaker-than-expected results were on ASP softness and a subdued industry utilisation rate that still continues on. Looking ahead, we expect high energy prices to potentially drag profitability for at least 1-2 quarters. We maintain our call for SUCB with a 12% ESG discount.

• Results overview. SUCB reported a 1QFY23 core net loss of MYR27m after excluding a one-off unrealised FX gain of MYR32.7m. The result was way below our and consensus’ estimates – no thanks to continued weakness in glove ASPs (likely ranging between USD20 and USD24 per 1,000 pieces), sales continuing to be adversely impacted by the Withhold Release Order or WRO by US Customs & Border Protection, 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 main reasons dragging profitability. For the coming quarters, we gathered from industry players that gas tariffs increased by 26% in October and is expected to see another 15% spike in Jan 2023, followed by gradual normalisation for the remaining period.

• Outlook. We expect the rubber glove sector’s near-term outlook to remain murky, with a loss-making scenario likely to persist for the next 1-2 quarters. Nonetheless, should customers’ inventory levels begin to normalise by 1Q23, the industry may still continue to be filled with ample supply due to new capacities added over the years. In the medium term, the sector may need a required a period of consolidation, ie smaller/un-profitable players exiting the market. As such, we think the demand-supply imbalances could persist, which results in industry sub-optimal utilisation. In terms of balance sheet, SUCB sits in a net cash position of MYR2.7bn, 11% above its market cap vs -42% and -29% for Hartalega (HART MK, SELL, TP: MYR1.47) and Kossan Rubber (KRI MK, SELL, TP: MYR0.91). We believe its robust balance sheet should help SUCB ride through the near-term challenges.

• Earnings adjustments. We cut our FY23F-24F earnings by 56% and 26% to account for higher gas tariff assumptions. We keep our ASP assumptions unchanged and expect a moderate downtrend outlook for FY23-24. Our FY23F-24F earnings remain below current consensus figures.

• Maintain SELL, with a lower MYR0.46 TP post our earnings revision. We incorporate a 12% ESG discount to our intrinsic value to derive our TP, as the ESG score was below our country median. Key risks: Higher-than- expected sales volumes, stronger-than-expected USD against the MYR, and lower-than-expected raw material prices.

Source: RHB Research - 23 Nov 2022