Canada terminates contracts with SUCB
? Recent media reports state that the Canadian government has terminated (mutual consent) two contracts with SUCB for the supply of nitrile gloves.
? We are negative on this matter, as this will further weaken demand for SUCB’s products (Canada sales make up 9% of SUCB’s FY21 revenue).
? Downgrade to Reduce with lower TP of RM1.00. The worst is not over yet, given the prolonged impact of allegations of foreign labour abuse issues.
Mutual consent with Canadian government to cease two contracts
Recent media reports stated that the Canadian government and Supermax Corporation (SUCB) have mutually decided to terminate two existing contracts for the supply of nitrile gloves. This is due to allegations of forced labour issues and expected timelines for final audit results on its labour practices (which were expected in mid-Nov 2021). To recap, the Canadian government had earlier ‘paused’ deliveries of glove orders from SUCB on 10 Nov 2021, upon the announcement of a withhold release order (WRO) issued to SUCB from US Customs and Border Patrol on allegations of forced labour (20 Oct 2021).
Negative on this matter
We are negative on this matter, as we believe that orders from the Canadian government make up a significant portion of SUCB’s sales to Canada (9% of FY21’s total revenue). In addition to lower sales (lower utilisation rate as well), we believe that this will also further dampen SUCB’s credentials in terms of ESG practices. As a result, this may raise concerns over more potential contract terminations from other key customers going forward.
It has put a new foreign worker management policy in place
SUCB stated on 3 Jan 2022 that it has established a new foreign worker management policy to ensure its human resource and migrant worker practices are on par with International Labour Organisation (ILO) standards. This includes: i) settling all remediation payments to active workers, ii) commencing remediation payments to ex-workers since Sep 21 (to complete by Mar 22F) and iii) raising minimum wage to RM1,400/month for all workers (current minimum wage in Malaysia is RM1,200/month). SUCB is in the process of updating the US CBP on enhancements made under its new policies, while we await
details on the submission of key audit findings from its independent auditor to US CBP. Note that, we expect the WRO to be lifted by the US CBP by end-CY22 (end-1HFY23F).
Downgrade to Reduce, with a lower TP of RM1.00
We lower our FY22-24F EPS to account for lower sales volume and decline in ASPs. Accordingly, our TP declines to RM1.00 (15.3x CY23F P/E, 10% discount to its 5-year mean P/E of 17x – discount to account for ESG concerns). We also downgrade the stock to Reduce from Hold. In our view, current valuations (15% premium to its 5-year mean) have not accounted for ongoing ESG concerns (foreign labour aspect) and our view of an even sharper-than-expected decline in FY22-24 profitability. While SUCB’s net cash position of RM3.2bn (RM1.20/share) is attractive, this has yet to account for potential capex ahead, especially for its US-based plant (capex of RM2.3bn earmarked for this plant alone).