FOR once, let’s strike out Top Glove Corp Bhd from the equation in the battle of Malaysia’s Big-Four glove makers.
This is exactly what CGS-CIMB Research did when it looked into what the future holds for Supermax Corp Bhd and Kossan Rubber Industries Bhd.
In the research house’s view, Supermax’s average selling price (ASP) may decline at a faster rate compared to market ASPs as it has been a ‘trailblazer’ in hiking ASPs during the peak of the COVID-19 pandemic, thus recording higher ASPs than its peers.
This was due to (i) a larger portion of sales coming from spot orders (25-30% in 2H FY6/2021); and (ii) a portion of sales being derived from its own-brand manufacturing (OBM) model that allowed Supermax to enjoy trading and manufacturing margins.
“Yet, in a more balanced supply-demand environment in the glove sector, we think that Supermax’s OBM model does not provide higher margins compared to sales of OEM (original equipment manufacturer) products,” opined analyst Walter Aw in a company update.
Moreover, Supermax’s products are not allowed to enter the US (US sales made up 20% of its FY6/2021 sales) following the imposition of a withhold release order by the US Customs and Border Protection (CBP) on Oct 21.
This was followed by the Canadian Government putting a hold on glove purchases from Supermax (announced on Nov 14), resulting in the glove maker having to sell its gloves in other markets, especially in countries with lower ASPs.
All-in-all, CGS-CIMB Research reiterated its “hold” rating on Supermax with a lower target price of RM1.30 (from RM1.86 previously) premised on ESG (environmental, social and governance) concerns, especially forced labour allegations.
Interestingly, the research house expects Kossan to likely face less pricing pressure compared to its peers.
This is given that (i) Kossan took a more conservative approach in raising ASPs during the COVID-19 pandemic as most orders were committed to long-term recurring clients; (ii) an estimated 20% of Kossan’s glove sales (pre-pandemic) are made up of specialty gloves and/or for non-medical usage; and (iii) Kossan had lower spot sales (below 20% at peak of COVID-19 pandemic).
“While certain glove makers have highlighted plans to slow down their capacity expansion plans, Kossan has not indicated plans to slow down as it has least aggressive expansion plans against its peers,” noted CGS-CIMB Research.
“By end-CY2023F, we estimate that Kossan will grow its total annual glove production capacity by 26% (vs total sector capacity growth of 32%).”
As a whole, the research house retained its “add” call on Kossam but with a lower target price of RM2.20 backed by (i) the company’s current valuations at a 20.5% discount to its five-year mean of 17 times; and (ii) its strong net cash position (RM2.5 bil, 98 sen/share).
At 10.24am, Supermax was down 1 sen or 0.77% to RM1.29 with 4.74 million shares traded, thus valuing the company at RM3.51 bil, while Kossan was down 2 sen or 1.2% with 3.59 million shares exchanged hands, hence giving the company a market capitalisation of RM4.19 bil. – Dec 15, 2021
