CGS-CIMB Research does not seem to be convinced of a swift turnaround for Supermax Corp Bhd even as the glove maker has unveiled its plan to build its 18th manufacturing plant worldwide and its first in the US.
To re-cap, Supermax expects to commence construction of the first phase of its 315-acre glove plant in Brazoria County, Texas by 4Q FY6/2022F (2Q CY2022F) with commercial production slated to happen by 4Q FY6/2023F (2Q CY2023).
“Overall, we make no changes to our FY2022-2024F EPS estimates pending further updates on this matter (tax incentives, progress updates and commissioning of new lines),” opined analyst Walter Aw in a company update.
“Hence, we maintain our “reduce” call on Supermax with an unchanged target price of 98 sen 0.98 (15.3 times CY2023F price-to-earnings ratio).
“In our view, current valuations (8% premium to its five-year mean) have yet to capture its weaker-than-expected earnings outlook (in FY2022-2024F) and ongoing ESG (environmental, social and governance) concerns (foreign labour aspect).”
At this juncture, CGS-CIMB said it is “slightly positive” on Supermax’s upcoming US plant, assuming (i)) strong execution; (ii) no delays in construction works; and (iii) no cost overruns.
“In addition to potential tax incentives, this plant will bring Supermax’s glove supply nearer to its US-based clients, resulting in lower freight cost and faster delivery time,” opined the research house. “Also, this plant will not likely face the social compliance issues affecting current existing facilities in Malaysia.”
Nevertheless, CGS-CIMB Research is wary of higher construction costs (at least 100% more than a similar plant in Malaysia) due to higher waste management and labour costs.
“We estimate the US plant will likely be loss-making at the initial stages until certain economies of scale is achieved (all 12 lines commissioned with >65% utilisation rate),” projected the research house.
For the first phase of its US plant, Supermax has earmarked total capex of US$350 mil (RM1.5 bil) which in CGS-CIMB Research view is inclusive of equipping the plant with cutting-edge capabilities via expanded use of artificial intelligence (AI) and robotic engineering (lower usage of workers, and better efficiencies).
“We estimate that Supermax will have no issues in funding the first phase of its US plant given its positive net cash situation as of end-2Q FY6/2022. We believe the subsequent phases will cost less per phase – we estimate RM500 mil-RM600 mil per phase,” added the research house.
At 10.30am, Supermax was up 4 sen or 3.42% to RM1.21 with 3.86 million shares traded, thus valuing the company at RM3.29 bil. – March 31, 2022
