CGS-CIMB Research lowers Supermax earnings, cuts TP to RM2.16


On Thursday, the US CBP announced that it will seize all of Supermax’s products that enter US ports of entry. Allegations of forced labour have led to US CBP placing a withhold release order (WRO) on disposable gloves produced by Supermax and all its subsidiaries.

KUALA LUMPUR: CGS-CIMB Equities Research has lowered the earnings outlook for Supermax Corporation Bhd and slashed the target price to RM2.16 from RM3.20 after the US Customs and Border Protection (CBP) announced it will seize all of its products that enter US ports.

The research house had on Friday lowered its FY22-24F EPS by 15.3-18.5% mainly to account for: i) lower average selling prices or ASPs (higher sales to less profitable markets), ii) lower sales volume, and iii) lower economies of scale.

“Note that we have assumed that the CBP ban will only be lifted by end-1QFY23F,” it said.

CGS-CIMB Research said in tandem with its EPS cuts, its TP is lowered to RM2.16. Its also cut its CY23F target P/E from 16 times to 12.8 times, as it added a 20% discount to the sector’s five-year historical mean to account for ESG concerns, especially with regards to forced labour.

“Despite weak near-term earnings and negative news flow, we keep our Hold call as we believe that current valuations (CY23F P/E is at a 23.8% discount to the glove sector’s five-year mean of 16 times and a 13% premium to its net tangible asset (NTA) of RM1.80/share) have largely accounted for these factors.

On Thursday, the US CBP announced that it will seize all of Supermax’s products that enter US ports of entry. Allegations of forced labour have led to US CBP placing a withhold release order (WRO) on disposable gloves produced by Supermax and all its subsidiaries.

According to CBP, its investigation shows Supermax had used forced labour in its manufacturing operations, with 10 (out of 11) International Labour Organization’s (ILO) forced labour indicators identified.

In its press statement, CBP stated Supermax’s products are not welcomed in the US until the company can prove that its manufacturing operations are free of forced labour.

“We view this development negatively. Supermax’s management had initially guided that sales to the US would make up 25%-30% of its FY22F sales (down from 40%-50% in FY21).

“Hence, Supermax would now need to sell its gloves in other markets, which may have lower ASPs, until this CBP matter is resolved.

“We gather from SUCB that it had already engaged two independent auditors to carry out forced labour audits on its operations. We understand that audit activities are currently ongoing at all of its plants, with Supermax planning to submit its audit findings (via an independent audit report) to CBP. We expect this report to be submitted in three to four months, while CBP’s review may take another six to nine months,” CGS-CIMB Research said.

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