Glove maker to contend with ASP normalisation

PETALING JAYA: Although Supermax Corp Bhd’s recent earnings came in slightly above expectations, further normalisation of average selling prices (ASPs) for gloves will continue to weigh on profits in the coming quarters.

In the first quarter ended Sept 30, 2021, the glove maker’s net profit declined by 19.1% to RM638.52mil year-on-year (y-o-y) although revenue rose 7.6% to RM1.46bil.

In a report, Kenanga Research said Supermax’s profit after tax and minority interest made up 60% and 50% of its and consensus’ respective full-year forecasts.

This has prompted the research house to raise its FY22 net profit estimate by 12%.

However, it cautioned that earnings in subsequent quarters may be impacted by potential revenue loss from the US Customs and Border Protection’s (CBP) Withhold Release Order (WRO) as well as faster-than-expected normalisation of ASP.

Note that the US accounts for about 20% of sales.

Recall that CBP had issued a WRO against Supermax which identified 10 of the International Labour Organisation’s (ILO) indicators of forced labour in manufacturing operations during its investigation.

“The group claimed that it had taken measures to meet the ILO standards on migrant workers since 2019.

“The group highlighted that it had on Oct 11, 2021 commissioned an independent international consulting firm to conduct an audit into the status of foreign workers in the Supermax Group’s manufacturing facilities.

“The impact severity (of this) on earnings depends on how fast Supermax can replace loss of sales in the United States, and 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,” Kenanga Research said.

Additionally, the company would be affected by the one-off Cukai Makmur or prosperity tax as announced by the government under Budget 2022.

While the brokerage has maintained its “market perform” recommendation on the stock, it cut its target price to RM1.95 from RM2.15 previously, based on 10 times FY23 earnings per share.

Its price-earnings-ratio was lowered from 11 times to 10 times to take into consideration the downside risk to revenue from the CBP WRO.

On the other hand, MIDF Research has upgraded Supermax to “neutral” from “trading sell” with an unchanged target price of RM1.67.

“With the recent share price correction, we believe the shock from the US custom ban has been priced in,” it said.

The research house has revised its earnings forecast for FY22 down by 3% to factor in the impact of the prosperity tax.

“Based on our estimation, Cukai Makmur will only cost Supermax an additional RM34.1mil. Our underlying earnings is left unchanged as we expect the US ban to impact Supermax in the coming quarters.”

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