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Tougher quarters ahead

■ 1QFY6/22 core net profit of RM639m, at 37% of our FY22 forecast, is below our expectation as we see weaker ASPs and sales volume in quarters ahead.
■ We expect SUCB’s near-term earnings to remain weak, due to impact from issuance of WRO by US CBP on SUCB, which should affect 20% of its sales.
■ Reiterate Hold. We cut our FY22-24F EPS by 12-17% and TP to RM1.86.

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1QFY6/22 core net profit of RM639m below expectations

1QFY6/22 core net profit was RM639m (-19.1% yoy, -33.4% qoq), at 37% of our forecast and 49% of Bloomberg consensus full-year estimate. We deem this to be below our expectation (but in line with Bloomberg consensus) as we anticipate weaker qoq earnings for the rest of the year due to lower average selling prices (ASPs) and lower sales volume. SUCB declared an interim dividend of 5 sen/share, within expectations.

1QFY22: Weaker profitability due to lower sales volume and ASPs

1QFY6/22 revenue declined 22.4% qoq to RM1.5bn on the back of lower sales volume and decline in ASPs. The former was due to lower production volume caused by a temporary closure of SUCB’s manufacturing operations during the Enhanced Movement
Control Order (EMCO) period in Jul 2021. This also resulted in 1QFY22 EBITDA margin waning 1% pt qoq to 65.6%, while 1QFY22 core net profit declined 33.4% yoy to RM639m. The latter was aggravated by associate losses of RM3.7m (vs. RM2.5m profit in 4QFY21) due to lower ASPs and forex losses, and higher tax rate (+10.6% qoq).

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Negative impact from US CBP ban and Canada pausing purchases

On 21 Oct, US Customs and Border Protection (CBP) placed a Withhold Release Order (WRO) on disposable gloves produced by SUCB after it found evidence of forced labour in SUCB’s operations; SUCB’s products are now prohibited from entering the US (20% of SUCB’s FY21 sales). On 14 Nov, the Canadian government announced it is putting its contract with SUCB on hold; Canada accounted for 9% of SUCB’s FY21 sales. SUCB stated that a US-based independent auditor is currently conducting a social compliance audit, with the report to be submitted to relevant authorities by the 4th week of Nov.

FY22-24F EPS cut by 12.2-16.5%

We lower our FY22-24F EPS by 12.2-16.5% to account for: i) impact of Makmur Tax (in FY22), ii) lower sales volume (due to forced labour issues), and iii) lower ASPs (SUCB has to sell its products in less developed markets at lower ASPs due to the US CBP ban).

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Reiterate Hold, with lower TP of RM1.86

In tandem with our EPS cuts, our TP is lowered to RM1.86, still based on 12.8x CY23F P/E, a 20% discount to the sector’s 5-year mean of 16x. The discount is to account for ESG concerns, especially with regards to forced labour. Despite SUCB’s weak near-term earnings and negative newsflow, we keep our Hold call as we believe these concerns are largely priced in at its current valuations; CY23F P/E is at a 16.6% discount to its 5-year mean of 15x and 5.2% premium over its NTA of RM1.91/share.

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