SUPERMAX Corp Bhd’s latest US venture comes with overseas execution risk amid near-term oversupply situation in view of robust expansion plans from new and existing players.
Over the next few quarters, the group is expected to face tough operating environment of falling average selling prices (ASPs) and margins normalisation including potential loss of revenue in the US, according to Kenanga Research.
“Note that the US accounts for approximately 20% of sales. 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,” opined analyst Raymond Choo Ping Khoon in a company update.
“Note that it took almost a year for Top Glove Corp Bhd to be cleared of such ban.”
On Friday (Dec 17), Supermax announced that it is venturing into the US to manufacture medical gloves by building a distribution warehouse for other PPE on a 215-acre site in Brazoria County, Texas with an initial first phase capital outlay of US$350 mil (RM1.5 bil).
This is despite the US Customs and Border Protection (CBP) having issued a withhold release order (WRO) against Supermax on Oct 20 after identifying 10 of the International Labour Organization’s (ILO) indicators of forced labour in the latter’s manufacturing operations during its investigation.
“Due to over-ordering in the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment which signals acceleration in overall market ASP normalisation,” projected Kenanga Research.
“We are unable to quantify as to how low ASP will fall to; however, glove manufacturers are of the view that ASP is unlikely to go below pre-COVID pricing considering that the cost structure has risen among others including social compliance costs.”
All-in-all, the research house retained its “market perform” rating on Supermax but trimmed the company’s target price to RM1.45 (from RM1.95 previously) in view of “execution risk concern in its US ambition”.
Elsewhere, MIDF Research described Supermax’s inroad into the US as “ambitious” given the glove industry is at an impending oversupply situation given rising competition from China players coupled with declining ASP.
“While the US is the major revenue contributor for the group, we posit that an expansion plan at this juncture could exacerbate the demand-supply imbalance and result in lower ASP, thus affecting the group’s bottom line,” reckoned the research house.
As a whole, MIDF Research reiterated its “neutral” call on Supermax with a lower target price of RM1.48 (from RM1.67 previously).
At 10.16am, Supermax was up 3 sen or 2.11% with 21.53 million shares traded, thus valuing the company at RM3.94 bil. – Dec 20, 2021
