Supermax Corp - Minor Setbacks; Maintain BUY

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+0.22 (27.16%)
  • Maintain BUY, new MYR1.03 TP (DCF) from MYR1.06, 12% upside. Supermax Corp’s 2QFY24 (Jun) numbers disappointed after registering a core net loss of MYR15m amid one-off logistical constraints caused by the Red Sea crisis and subdued ASPs. We still retain our bullish stance, underpinned by the gradual improvement in market dynamics (by 2HCY24) that should propel SUCB to profitability – not forgetting a sequential pick-up in sales volume as the Withhold Release Order (WRO) is now lifted.
  • Results overview. SUCB reported a 2QFY24 core loss of MYR15m vs a MYR0.5m profit in 1QFY24. This brought 1HFY24 core losses to MYR14.6m – short of our and Street’s expectations. Despite losses narrowing on a YoY basis (owing to better cost management and favourable FX movements), its QoQ performance was predominantly dragged by one-off logistical hiccups arising from the Red Sea crisis. ASPs remain largely stable at USD20/1,000 pieces – we believe this was attributed to the easing of raw material prices during the earlier quarter.
  • Cost. Opex were lower YoY on the group’s cost-management efforts (eg a de- commissioning exercise) and a natural gas tariff normalisation. That said, we expect the cost structure to pick up slightly by the coming quarters as natural latex prices are 16% higher QTD vs 4Q23’s numbers – this was on a low production season. Natural gas prices were 21% QTD lower on lacklustre heating demand (from Europe) amid a warmer-than-expected winter.
  • Outlook. Moving forward, we expect SUCB’s sales volume to pick up sequentially as the WRO imposed by US Customs & Border Protection was lifted on 18 Sep – this is coupled with a more balanced demand-supply dynamic by 2HCY24. We now expect ASPs to trend higher in 3QFY24 in view of elevated raw material prices. All in, we retain our view that gloves demand will continue picking up in the coming quarters, as client inventory levels deplete – this is on top of such inventory (stockpiled since 2020) approach their expiry dates (typical shelf life for gloves: 3-5 years).
  • Earnings adjustments. Post the results, we lower our FY24F-25F earnings by 14% and 14% after factoring in less-aggressive price hikes moving forward. After such adjustment, our DCF-derived TP is now lowered to MYR1.03, which implies 1x FY24F P/BV against SUCB’s pre-COVID-19 historical mean of 1.3x. Our TP incorporates a 13% ESG discount, as the group’s 2.3 ESG score is below the 3.0 country median.
  • Key risks: i) Higher-than-expected sales volumes, ii) a stronger-than- expected USD against the MYR, and iii) lower-than-expected raw material prices.

Source: RHB Research - 21 Feb 2024

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