Quick take: Supermax falls 3.94% on contracts termination


KUALA LUMPUR: Shares in Supermax Corp Bhd fell almost 4% in early trade Friday after confirming that two of its existing contracts for the supply of nitrile gloves in Canada have been terminated.

The glovemaker fell 3.94%, or 5 sen to RM1.22 with over 5.3 million shares traded at 9.43 am.

Supermax said its Canadian subsidiary, Supermax Healthcare Canada Inc had agreed to terminate by mutual consent with the Federal Government of Canada the two existing contracts for the supply of nitrile gloves.

“We are negative on this matter, as we believe that orders from the Canadian government make up a significant portion of Supermax’s sales to Canada (9% of FY21’s total revenue),” CGS-CIMB Research said in a report.

In addition to lower sales (lower utilisation rate as well), CGS-CIMB believed that this would also further dampen Supermax’s credentials in terms of ESG practices.

As a result, this may raise concerns over more potential contract terminations from other key customers going forward.

Supermax stated on Jan 3, 2022, that it had established a new foreign worker management policy to ensure its human resource and migrant worker practices are on par with International Labour Organisation (ILO) standards.

This includes settling all remediation payments to active workers, commencing remediation payments to ex-workers since Sep 21 (to complete by Mar 22F) and raising the minimum wage to RM1,400 per month for all workers (current minimum wage in Malaysia is RM1,200 per month).

“Supermax is in the process of updating the US CBP on enhancements made under its new policies, while we await details on the submission of key audit findings from its independent auditor to US CBP.

“Note that, we expect the WRO to be lifted by the US CBP by end-2022 (end-1HFY23F),” it said.

CGS-CIMB has downgraded the stock to “reduce” from “hold” with a lower target price of RM1.

The research house has lowered its FY22-24F EPS to account for lower sales volume and a decline in ASPs.

“Accordingly, our target price declines to RM1 (15.3x CY23F P/E, 10% discount to its 5-year mean P/E of 17x – discount to account for ESG concerns).

“In our view, current valuations (15% premium to its 5-year mean) have not accounted for ongoing ESG concerns (foreign labour aspect) and our view of an even sharper-than-expected decline in FY22-24 profitability.

“While Supermax’s net cash position of RM3.2bil (RM1.20/share) is attractive, this has yet to account for potential capex ahead, especially for its US-based plant (capex of RM2.3bil earmarked for this plant alone),” it said.

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Glove , supermax , Canada , ASPs

   

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