• Maintain BUY, with new MYR1.01 TP (DCF) from MYR1.03, 10% upside. Supermax 3QFY24 (June) results disappointed as it registered core net profit of MYR0.5m, bringing its 9MFY24 core losses to MYR14m – below ours and consensus’ estimates. However, we maintain our bullish stance on SUCB, underpinned by the sectoral improvement in market dynamics (by 2H24), which should propel it to profitability. Our TP incorporates a 13% ESG discount as its 2.3 ESG score is below our country median of 3.0.

• Results overview. SUCB reported core profit of MYR0.5m in 3QFY24 (vs core losses of MYR15m and MYR31.9m in 2QFY24 and 3QFY23). Results were below ours and Street’s expectations likely due to subdued sales volume (as Withhold Release Order has been lifted since 3Q23). The group attributed better cost management and higher realised FX gain as key drivers in turning around its profitability. Assuming a blended ASP of USD20/1,000 pieces, it leads to an estimated volume sold of 1.5bn pieces this quarter (implying a 3.5% QoQ decline).

• Cost. Operating expenses were lower YoY owing to the group’s cost management efforts (de-commissioning exercise). That said, we expect cost structure to pick up slightly in the coming quarters on the back of higher natural latex prices (9% higher QTD in 2Q24). Meanwhile, natural gas price is expected to stabilise (+0.3% QTD in 2Q24).

• Outlook. Industry demand-supply dynamics continue to show signs of recovery on the back of: i) Inventory destocking cycle coming to an end, ii) improving order visibility (April and May order volumes picking up), and iii) customers are more receptive of price hikes. With the industry excess capacity gradually phased out, we expect the glove industry to achieve demand-supply equilibrium by 2H24. Moving forward, we expect ASPs to trend higher in 4QFY24 in view of higher raw material prices. All in, we retain our view that gloves demand will continue to pick up in the coming quarters as client inventory levels continue to deplete. This is on top of their glove inventory levels (stockpiled since 2020) approaching expiry dates (typical shelf life for gloves: 3-5 years).

• Earnings adjustments. Post results, we lower our FY24-FY25 earnings estimate to –MYR13m and MYR22m from MYR14m and MYR77m, taking into account the slower-than-expected volume recovery offset against higher USD/MYR exchange rate. Every USD0.50 increase/decrease to our ASP assumption (FY24-FY26) is expected to lift/reduce our TP by MYR0.02.

• Post earnings adjustment, our DCF-derived TP is now lowered to MYR1.01. Our TP implies a 0.9x FY25F P/B, against its pre-COVID-19 historical mean of 1.3x. Key risks: Higher-than-expected sales volumes, stronger-than- expected USD/MYR rate, and lower-than-expected raw material prices.

Source: RHB Research - 29 May 2024