• Still NEUTRAL, higher MYR0.87 TP (DCF) from MYR0.80. US Customs & Border Protection (US CBP) has modified the Withhold Release Order (WRO) issued on 21 Oct 2021 against Supermax Corp following the latter’s successful remediation of forced labour practices in the group’s supply chain. Based on our back-of-envelope calculations, this move is expected to lift our FY24F (Jun) revenue by 8%. We incorporate a lower ESG discount of 13% as we upgrade SUCB’s ESG score post this development.

• Summary from the press release. Following the announcement by US CBP on the upliftment of the export ban, the latter will now allow imports of disposable gloves manufactured by SUCB and its wholly owned subsidiaries to enter the US – effective immediately. Recall: US CBP imposed sanction against the group following an investigation that found the latter in breach of 10 of the 11 forced labour indicators outlined by the International Labour Organisation. Since then, SUCB has rolled out a new and comprehensive Foreign Worker Management Policy. This was to immediately strengthen its migrant workers policies – primarily in areas such as workplace violence, retention of identity documents, withholding of wages, excessive overtime, and debt bondage. The group also reached out and reimbursed former migrant workers that had paid recruitment fees to obtain employment with SUCB. The group said it paid out a total of MYR41.2m in remediation payments to existing and former workers.

• Our thoughts. We are positive on this – it could lead to sequential improvements in export sales to the US. Prior to the US CBP ban, sales to the American continent accounted for 50% of SUCB’s total sales. Assuming exports to this continent recover to the 50% threshold (from c.40% in FY24), this will result in 8% upside from our previous FY24 revenue estimate.

• Outlook. We expect a demand recovery to happen by 2HFY24, given that we have yet to see consistent export figures. While we remain sector NEUTRAL, given the lack of demand visibility in the near term (on top of challenges to raise prices in the near term), the normalised cost outlook – coupled with industry-wide capacity rationing exercises – could offer respite to local glove makers like SUCB.

• Earnings adjustments. We raise our FY24F-25F core earnings to MYR10- 76m from MYR3-64m post the lifting of US CBP’s WRO.

• Maintain NEUTRAL with a higher MYR0.87 TP. We raise our S score post the upliftment of the US CBP ban, which results in a lower ESG discount of 13% from 15% previously. Key upside/downside risks: Increase/decrease in glove ASPs, faster-/lower-than-expected capacity expansion, higher- /lower-than-expected utilisation rates, and lower-/higher-than-expected raw material prices.

Source: RHB Securities Research - 21 Sept 2023