SUPERMAX Corp Bhd is poised to endure erosion of earnings over the next two quarters following its 3QFY22 sharp fall in margins due to its overseas distribution units having to sell high-priced inventory at falling market prices.
Going forward, Kenanga Research further expects the glove maker’s earnings in subsequent quarters to be impacted by (i) potential revenue loss from the US Customs and Border Protection’s (CBP) Withhold Release Order (WRO) which accounts for 20% of sales; (ii) ASP normalising faster than expected; and (ii) impact from one-off prosperity tax in its FY6/2022.
Towards this end, the research house has reiterated its “underperform” rating on Supermax while slashing the glove maker’s target price further to 75 sen (from 90 sen previously) in view of execution risk concerns in its US ambition.
“We believe performance in subsequent quarters could also be impacted by (i) logistic challenges caused by the global shipping container shortage of which we understand are unlikely to abate over the next two quarters,” opined analyst Raymond Choo Ping Khoon in a results review.
“Moreover, there could be margin crunch as raw material cost is not adjusting as fast as falling ASP, hence earnings could be lower sequentially.”
According to Kenanga Research, Supermax’s quarter-on-quarter (qoq) 3Q FY6/2022 revenue fell 22% in view of lower average selling prices (ASPs) and lower volume sales exacerbated by imposition of the WRO by the CBP and freezing of orders from the Canadian Government.
Its EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin fell to 9% from 21% in 2Q FY6/2022 due to (i) sales of high-priced inventory at falling market prices which could well mean that certain shipment were sold at a loss; and (ii) lower ASP which fell faster than a corresponding decline in input raw material cost.
This brings 3Q FY6/2022 net profit to RM13 mil (-73% qoq). Year-on-year (yoy), 9M FY6/2022 net profit fell 76%, dragged down by falling ASP and a higher effective tax rate of 29% vs 23% in 9M FY6/2021.
In view of this, Kenanga Research has downgraded Supermax’s FY6/2022E net profit by 21% after taking into account reduced EBITDA margin to 31% from 35%. It also slashed FY6/2023E net profit by 17% after taking into account lower utilisation from 68% to 65% and EBITDA margin to 17% from 18%.
“The group claimed that it had taken measures to meet the International Labour Organisation (ILO) standards on migrant workers since 2019. Note that the US accounts for approximately 20% of sales,” highlighted the research house.
“The impact severity on earnings depends on (i) how fast Supermax can replace loss of sales in the US; and (ii) how long it takes for the group to resolve the issue. Note that it took almost a year for Top Glove Corp Bhd to be cleared of the ban.”
At 10.13am, Supermax was up 1 sen or 0.97% to RM1.04 with 2.85 million shares traded, thus valuing the company at RM2.88 bil. – May 26, 2022
