• Maintain BUY, with new DCF-derived TP of MYR1.01 from MYR1.04, 22% upside. Supermax is expected to benefit from the potential trade diversion with the latest revision of higher import tariff by the US on China glove makers. Execution remains crucial as the recent weakening USD should be a key hindrance among investors. We maintain our BUY call on the company premised on industry demand-supply dynamics continuing to show signs of recovery and customers being more receptive towards price hikes.

• Industry dynamics. We learnt that the industry operating dynamics have turned favourable for gloves manufacturers as customers are more receptive to the ASP increase. That said, industry blended ASP is set to improve further to USD21-22/1,000 pieces (pcs) by 4QCY24 as Malaysian glove makers are in the discussion stage to raise prices to translate the effect of weakening USD to customers. China glove makers’ ASPs now range at USD18-19/1,000 pcs from USD17-18 in the previous quarter. In terms of demand, Malaysia’s gloves export volume surged 66% MoM and 105% YoY in August, outpacing the growth in July (+12% MoM; +43% YoY). The latest export volume is even 34% higher compared to the pre-pandemic’s 2-year monthly average number, indicating that the recovery momentum of global gloves demand remains healthy.

• US tariff on China. To recap, The Office of the United States Trade Representative (USTR) announced the final modifications concerning the statutory review of tariff actions on China, entailing a new set tariff rate on medical/surgical gloves, which will be revised to 50% and 100% (effective 2025 and 2026) from 25% effective 2026 as proposed in May.

• Earnings revision and valuation. We lower our FY25F-26F (Jun) earnings to -MYR7m and MYR10m from MYR23m and MYR49m, largely reflecting the impact of the weakening USD against the MYR. Our USD/MYR assumptions for FY25-26 were lowered to 4.13 and 4.05 from 4.55 and 4.50. For every 5% change in USD/MYR, the impact to SUCB’s FY25F-26F net earnings is at MYR15m and MYR17.5m. While the weaker USD may result in margin compression in the near term, we believe the impact could be mitigated by the company raising ASP to offset against the weakening USD (currently in the discussion stage with customers to raise prices by at least USD1) which in turn should sustain our base case long-term margin outlook. SUCB’s valuation remains compelling, trading at -0.4SD from its 2-year historical mean. Post earnings adjustment, we derive our TP of MYR1.01, representing 0.6x FY25F P/BV, or +2SD from its 2-year historical mean, and including a 14% ESG discount.

• Key risks: Decrease in gloves ASP, slower-than-expected capacity expansion, lower-than-expected utilisation rate, and higher-than-expected raw material prices.

Source: RHB Research - 7 Oct 2024