SUPERMX's 1QFY25 was hampered by forex loss. It guided for a gradual recovery in demand, underpinned by inventory rebuilding from glove distributors. However, the group is also still fulfilling low-priced contracts until Dec 2024. We keep our earnings forecasts and TP of RM0.83. While we are positive on strong demand recovery, we are concerned on execution risk at its US operation. As such, we retain our MARKET PERFORM call.

SUPERMX register a 1QFY25 net loss of RM65m, compared to our full- year net profit forecast of RM15m and the full-year consensus net profit estimate of RM27m. We consider the results within our expectation in anticipation of a better 2HFY25 driven by a strong demand recovery. No dividend was declared in this quarter as expected.

YoY, its 1QFY25 revenue rose 26% due to, we believe, a higher sales volume and slightly lower ASP. However, its loss at EBITDA level narrowed to RM76m compared to RM111m in 4QFY24, thanks to: (i) sales of high-cost inventory coming to an end, and (ii) better economies of scale/cost absorption as its utilisation rate improved. As a result, its 1QFY25 net loss narrowed to RM65m compared to RM127m in 4QFY24.

QoQ, its 1QFY25 topline rose 25% due to, we believe, a higher sales volume and slightly lower ASP. At the net level, its 1QFY25 losses widened to RM65m compared to RM2m in 4QFY24 due to: (i) sales of high-cost inventory, and (ii) forex loss.

Outlook. Despite the challenges faced, the group expect its performance to improve in the 1HCY25, as it continues to consolidate its manufacturing operations to improve overall efficiency and productivity. As for its overseas distribution centres, they will return to profitability once their high price stocks are fully depleted by end-CY2024. With market expectations of losses and falling ASPs increasingly being priced in, we see sector value emerging on a medium-term horizon. Amplifying the optimism are:

(i) indications pointing towards strong demand recovery in 2HCY24 and CY25 underpinned by inventory rebuilding from distributors and faster- than-expected industry consolidation, ( ii) tell-tale signs that predatory pricing by certain overseas players (i.e. selling below cost over an extended period to eliminate competitors) have diminished as Chinese players' utilization hit >90%, and (iii) US imposition of tariff ratchets up to 50% and 100% in CY25 and CY26, respectively, (revised up as announced on 13 Sept) making Malaysian glove makers the prime beneficiary. We expect glove stock prices to re-rate in anticipation of near-term earnings upsurge which clearly is a positive for the sector. We now expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants and exit of new entrants. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is no more net new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

Valuations. We maintain our forecasts and TP of RM0.83 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. Despite the improving outlook, we are applying a wider discount of 70% compared to historical 30% due to execution risk at its US plant. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 3). Reiterate MARKET PERFORM.

Key risks to our recommendation include: (i) stronger-than-expected organic growth in global demand for gloves, (ii) oversupply situation eases on significant industry consolidation, and (iii) benign labour and energy costs.

Source: Kenanga Research - 29 Nov 2024