SUPERMX disappointed with a wider-than-expected 9MFY24 net loss on a weak sales volume and margins. Nonetheless, its 9MFY24 net loss narrowed YoY. We widen our FY24F net loss forecast to RM50m (fromRM5m) but fine-tune down our TP to RM0.83 (from RM0.84). Downgrade to UNDERPERFORM from MARKET PERFORM after the recent unjustified run-up in its share price.

SUPERMX disappointed with a huge 9MFY24 net loss of RM47m, compared to our full-year net loss forecast of RM5.2m and the full-year consensus net loss estimate of RM2.2m. The variance against our forecast came largely from a lower-than-expected sales volume and margins.

QoQ, its 3QFY24 revenue fell 2% due to, we believe, a slightly lower sales volume and ASP. It returned into EBITDA positive of RM10m compared to a loss of RM40m in 2QFY24 thanks to: (i) depleting high- cost inventory, and (ii) lower cost base following the decommissioning of certain inefficient production capacity. As a result, its 3QFY24 net loss narrowed to RM0.7m compared to a loss of RM44m in 2QFY24.

YoY, its 9MFY24 topline fell 22% due to a lower ASP and sales volume. At the net level, its 9MFY24 losses narrowed to RM47m compared to RM142m in 9MFY23 due to depleting high-cost inventory and on a lower cost base following the decommissioning of certain inefficient production capacity.

Outlook. It guided for no significant improvement in performance in 2024 due to the high volume of high-priced stocks at its overseas distribution centres. Overall, it expects the current challenging operating environment to persist and only expect a likelihood of a meaningful recovery to take place only sometime in 2025. We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces (due to a low base effect in CY23) and resume its organic growth of 15% thereafter. This will result in an excess capacity of 212b pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation willcontinue to plague the industry in CY24.

Forecasts. We now forecast a net loss of RM50m in FY24 (from a RM5m loss) as we reduce our utilisation rate assumption to 38% from 43% and EBITDA margin to 1% from 5%. We maintain our FY25F numbers.

Valuations. We fine-tune down our TP to RM0.83 (from RM0.84) based on 0.5x FY24F BVPS, at 70% discount to the sector’s average of 1.7x charted during previous downturns in 2008−2011 and 2014−2015. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 3). Downgrade to UNDERPERFORM from MARKET PERFORM after the recent unjustified run-up in its share price.

Key risks to our recommendation include: (i) stronger-than-expected organic growth in global demand for gloves, (ii) oversupply situation eases on significant industry consolidation, and (iii) benign labour and energy costs.

Source: Kenanga Research - 29 May 2024