Analyst downgrades as Supermax hit with US ban

KUALA LUMPUR: Supermax Corp Bhd is facing earnings downgrades from analysts following the US import ban on its disposable gloves.

The US Customs and Border Protection (CBP) in a Wednesday statement said it had issued a withhold release order on Supermax and its subsidiaries based on information that reasonably indicated their use of forced labour in manufacturing operations.

In response, the glove maker announced on Bursa Malaysia that its US representatives are in touch with the US CBP to obtain more clarity and information on the withhold release order and the required measures going forward.

In a note, Kenanga Research said the latest development is negative to Supermax and is likely to impact its earnings considering that the US commands premium ASP and accounts for approximately 20% of sales.

"The severity to earnings depends on how fast Supermax can replace loss of sales in the US and how long it takes for the group to resolve the issue," it said.

The brokerage noted that it took almost a year for Top Glove to be cleared of a similar ban.

In addition, Supermax's situation could be further compounded by the faster-than-expected normalisation in the average selling price of rubber gloves.

According to Kenanga, Top Glove Bhd's recent 4QFY21 results briefing suggested that its ASPs have dropped faster than expected at 31% quarter-on-quarter to US$48 per 1,000 pieces.

"We believe this signals acceleration in overall market ASP normalization.

"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 amongst others including social compliance costs and the high nitrile feedstock cost compared to pre-COVID era," it said.

"We cut our TP from RM2.35 to RM2.15 based on 11x FY23E EPS (at -0.5 SD below 5-year pre-COVID forward historical mean of 15x).

"The PER is lowered from 12x to 11x taking into consideration of downside risk to revenue from the CBP WRO," it said.

However, Kenanga, which maintained "market perform" on the stock, expects disappointments in subsequent quarters to be capped as ASPs are no longer lofty.

Meanwhile, TA Securities Research said it expects Supermax to flush other markets with its US exports, which is expected to depress prices in markets where ASPs are usually lower by 5% to 10% compared to the US.

"We reduce our FY22/FY23 earnings estimates by 18.4%/20.9% after cutting our sales assumptions by 7.2% and ASP by 5.2%, while maintain our FY24 earnings assumptions," it said.

Consequently the research house, which has a "sell" call on Supermax, reduced its target price to RM1.43 a share from RM1.80 a share, based on revised 2023 price-earnings multiple of 12 times, down from 13x previously.
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