Supermax Corporation - Losses Widen Sequentially

Date: 
2024-02-21
Firm: 
KENANGA
Stock: 
Price Target: 
0.84
Price Call: 
SELL
Last Price: 
0.81
Upside/Downside: 
+0.03 (3.70%)

SUPERMX’s 1HFY24 results missed expectations on a doublewhammy of a weak sales volume and margins. It only expects a potential meaningful recovery in 2025. We now forecast a net loss of RM5m in FY24F (from a profit). We trim our TP slightly to RM0.84 (from RM0.85). Reiterate UNDERPERFORM.

SUPERMX’s 1HFY24 results disappointed, registering a net loss of RM46m, compared to our full-year net profit forecast of RM26m and the full-year consensus net profit forecast of RM25m. The variance from our forecast was due to a lower-than-expected sales volume and margins.

QoQ, its 2QFY24 revenue fell 18%, no thanks to a lower ASP and sales volume. It sunk into EBITDA loss of RM43m compared to a profit of RM23m in 1QFY24 no thanks to: (i) sale of high-priced inventory at falling market prices, (ii) lower overhead absorption on the back of less-thanoptimum utilisation rate, and (iii) higher input nitrile butadiene rubber price. As a result, its 2QFY24 losses widened to RM44m compared to RM2m in 1QFY24. YoY, its 1HFY24 topline fell 24% due to lower ASP and volume sales. At the net level, its 1HFY24 losses narrowed to RM46m compared to RM102m in 1HFY23. No dividend was declared in this quarter which came in within our expectation.

Outlook. The group expect the current challenging operating environment to persist and only expect a likelihood of a meaningful recovery to take place only sometime in 2025. We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces (due to a low base effect in CY23) and resume its organic growth of 15% thereafter. This will result in an excess capacity of 212b pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in CY24.

Forecasts. We now forecast a net loss of RM5m in FY24 (from a RM26m profit) as we reduce our utilisation rate assumption to 43% from 45% and EBITDA margin to 5% from 16%. We maintain our FY25F numbers.

Valuations. Correspondingly, we trim our TP to RM0.84 (fromRM0.85) based on 0.5x FY24F BVPS, at 70% discount to the sector’s average of 1.7x charted during previous downturns in 2008−2011 and 2014−2015. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 3). Reiterate UNDERPERFORM.

Key risks to our recommendation include: (i) lower-than-expected organic growth in global demand for gloves, (ii) persistent oversupply in the absence of significant industry consolidation, and (iii) rising labour and energy costs.

Source: Kenanga Research - 21 Feb 2024

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