WITH is average selling price (ASP) expected to fall in tandem with incoming new glove supply capacity globally and slower customer buying patterns, Supermax Corp Bhd will likely see a gradual decline in its sales margin, hence profitability in the near future.
As supply-demand dynamics in the glove sector normalises, CGS-CIMB Research expects Supermax’s profitability and margins to decline by a higher quantum vs its peers from 1Q FY6/2022F as its ASPs should be on par with industry average.
“Since COVID-19 (started), Supermax was the ‘trailblazer’ in hiking ASPs, posting above-average margins vs its peers,” opined analyst Walter Aw in a results review. “This was due to its own-brand manufacturing (OBM) model which enabled Supermax to enjoy both trading and manufacturing margins.”
According to CGS-CIMB Research, Supermax’s 4Q FY6/2021 core net profit came in at RM959 mil (+140% year-on-year [yoy]), bringing its FY6/2021 core net profit to RM3.9 bil (+649% yoy).
Nevertheless, this is below the research house’s (97%) but above Bloomberg consensus FY2021 estimates (106%).
The earnings miss was due to weaker-than-expected sales volume and sharp quarter-on-quarter (qoq) drop in associate contribution (weaker results from its associate in Brazil due to weaker ASPs and forex losses).
Moreover, Supermax declared a special dividend of 15 sen/share, bringing its FY2021 dividend to 31.8 sen/share which is below CGS-CIMB Research’s expectation of 51 sen (payout: 23%).
All-in-all, the research house has slashed Supermax’s FY2021-2023F earnings per share (EPS) forecast by 4.3-12.1% to account for the impact from the recent lockdown measures which led to (i) lower production volume; (ii) delay in capacity expansion plans; and (iii) idle costs (during the periods when it was unable to operate).
Accordingly, CGS-CIMB Research reduced the glove maker’s target price to RM3.20 (from RM3.50) while maintaining its “hold” rating as it believes that Supermax’s current valuations have fairly priced in potentially weaker earnings ahead.
However, Kenanga Research retained its “outperform” rating on Supermax albeit with a lower target price of RM5 (from RM6.49 previously.
“In our view, from the perspective of a long-term investor, we still see significant value in Malaysian glove players which command 65%-68% of global market share and have consistently evolve and innovate in terms of products and plant modernisation via automations,” justified the research house.
“The current share price weakness reflects an overly bearish take on the expected decline in ASP in subsequent quarters ahead.”
At 10.46am, Supermax was up 11 sen or 3.57% to RM3.19 with 9.53 million shares traded, thus valuing the company at RM8.7 bil. – Aug 27, 2021
