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US import ban expected to have significant impact on SUPERMX (7106) SUPERMAX CORP BHD's earnings, say analysts

KUALA LUMPUR (Oct 21): The US Customs and Border Protection's (CBP) move to ban imports from glove maker Supermax Corp Bhd over alleged forced labour at the company is expected to have a significant impact on its earnings, said analysts on Thursday (Oct 21).

“The US historically contributes around 20% to 30% of its earnings. So, we expect a significant impact on its earnings, considering gloves command premium pricing in the US compared to other countries,” KAF Research analyst Nabil Zainoodin told The Edge.

According to him, the impact also depends on how long it takes for Supermax to resolve the issue.

“Note that it took almost a year for Top Glove Corp Bhd to be cleared of the ban,” he added.

He also expects significant operating margin reversal in the forthcoming quarters as average selling prices (ASPs) of gloves will be contracting faster than expected in the face of enlarged capacity.

“Note that Supermax's expansion plan is still ongoing in a big way with five glove manufacturing plants currently under construction,” he said.

According to Supermax's latest financial results and bourse filing, the group completed the commissioning of the remaining production lines in Block B of Plant 12 in the last quarter of 2020 (4Q20), adding 2.2 billion gloves to the group’s annual installed capacity. The group has seen full-quarter contributions since 1Q21.

The company is currently building the five glove manufacturing plants concurrently, which are scheduled for completion progressively. The new plants will add 22.25 billion pieces of gloves in new capacity, bringing the group’s total capacity to 48.42 billion gloves when they are fully commissioned. Supermax would invest a total capital expenditure of RM1.39 billion in the new plants.

Meanwhile, an analyst who declined to be named said the US import ban may reduce the company's earnings by 15% for the financial year ending June 30, 2022 (FY22) as the US accounts for 50% of its sales.

As Top Glove took more than one year to lift the ban, he expects Supermax to probably take at least one year to resume exports to the US.

He opined that Supermax will immediately hire an auditor to go through the audit process and assess the damage from the impact of the ban.

However, he noted that the earnings impact will also depend on Supermax’s strategies.

“If the group decides to dump its gloves (like what Top Glove did when facing the import ban by the US), the earnings impact may be less,” he said.

He does not rule out the possibility of Supermax dumping gloves as the company logged in high prices in 4Q20.

“If the company dumps its gloves, glove ASPs, which were falling by 8% to 10% in October to December, will likely decline faster,” he said.

Fortress Capital Asset Management chief executive officer Thomas Yong also opined that the immediate impact of the CBP import ban on Supermax’s earnings is quite negative as about one-third of its earnings come from the US market, which usually can provide a higher selling price compared to other markets.

“The recovery pace would depend on how fast the company can rectify the ban as well as its ability to look for markets elsewhere,” he told The Edge.

He also said demand for gloves is already slowing down with the covid-19 vaccination rate rising globally, and the urgency of a big market player to sell its gloves in a relatively short period of time would intensify the competition as large players would strive to maintain their market share.

“Furthermore, players selling outside the US might face stiff competition from Chinese companies as they are ramping up capacity aggressively. All these potential developments are suggesting that a decline in selling prices will be inevitable,” he added.

In a press release on Thursday, the CBP said its officers at all US ports of entry will detain disposable gloves produced by Supermax’s wholly-owned subsidiaries Maxter Glove Manufacturing Sdn Bhd, Maxwell Glove Manufacturing Bhd and Supermax Glove Manufacturing.

“With 10 of the 11 forced labour indicators identified during the course of our investigation, the CBP has sufficient evidence to conclude that Supermax and its subsidiaries produce gloves in violation of US trade law,” said CBP Office of Trade executive assistant commissioner AnnMarie R Highsmith.

At the time of writing on Thursday, Supermax founder Datuk Seri Stanley Thai Kim Sim had not responded to questions sent by The Edge.

The share price of Supermax fell as much as 25 sen or 12.5% to a 17-month low of RM2. At 3.10pm, the counter had pared some losses at RM2.02, still down 23 sen or 10.22%. It was the eighth top loser on Bursa Malaysia, and the most actively traded stock on Thursday morning with 59.77 million shares done.

http://www.theedgemarkets.com/article/us-import-ban-expected-have-significant-impact-supermaxs-earnings-say-analysts

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