Supermax (SUCB MK)
Lower sales volume due to production halt
- Supermax reported a solid performance for 9MFY21, with corePATAMI of RM2,911m up by more than 20x, however it fell short of our expectations, but was in line with consensus.
– We believe the error occurred because we miscalculated the length of the production stoppage in February, which is anticipated to represent roughly 5-10% of the quarter’s output volume.
– We are cutting our FY21 earnings prediction by 7% to account for the FY3Q performance and cutting our target price to RM7.40 while keeping our BUY recommendation. The manufacturing standstill was underestimated.
We were disappointed by the flat earnings qoq since we overestimated the impact of SUCB’s facilities’ production halt due to the Covid19 outbreak, which resulted in sales falling by 3.1 percent qoq. The increase in ASPs was not enough to make up for it.
Given the resumption of manufacturing, we anticipate continued growth in overall sales volume in 4QFY21E. SUCB has recently increased capacity by about 8%. Nonetheless, the overall result is impressive, since 3QFY21 EBITDA of RM1.4 billion is still much greater than the RM107 million recorded the previous year.
ASPs, according to management, may have reached their high.
Interestingly, management’s ASP advice differed from that of its peers, since they feel ASPs have peaked and have since plummeted by 15-25 percent. Prices are expected to steadily reduce as demand for spot orders has reduced, which we believe is attributable to the softening of cases in the United States.
We feel that not all glove manufacturers are having the same problems, since some are still selling below market (peak) prices, leaving leeway for them to raise prices. We’ve already built in a 5-10% drop in ASP by the end of the year, and a 3-5% drop in ASP for moms in 2022.
To account for the performance in 3QFY21E, we are decreasing our EPS prediction for FY21 by 7%. As investors remain skeptical of the ASP trajectory, we are pegging valuation to a lower PE multiple of 10.6x (at -1SD of historical average), which is lower than the previous 15.6x (at historical average), and hence decrease our TP to RM7.40 (from RM10.90). The following are two major downside risks: 1) an unanticipated disruption in its production line, and 2) a jump in US$/RM volatility.
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