PublicInvest downgrades rubber gloves sector to underweight

The lower profits were mainly due to the sharp strengthening of the ringgit in a short timeframe.

KUALA LUMPUR: PublicInvest research has downgraded the rubber gloves sector to underweight from neutral previously as it expects price-earnings contraction to continue.

"Despite the recent selldown, we believe the sector is still trading at unattractive PE valuations and could potentially contract closer to historical average of 21-26x (previously we pegged our valuations at 24-33x forward earnings). 

"In addition, we cut the sector’s FY19-20F earnings forecasts by 3-14%," it said in a note.

The research house said there will be capacity expansion in the sector over the near term to meet the surge in demand for latex and nitrile gloves due to the vinyl gloves disruption in 2016/17.

Overall, it expects global supply for rubber gloves to grow by 15% in 2019.

According to PublicInvest, an aggressive expansion plan by Thailand's largest glove maker Sri Trang will negatively impact Malaysian glove makers. 

Sri Trang has expanded to a total production capacity of 21.1 billion pieces, and should arrive at 23 billion pieces as at the end of 2019, with a target to achieve 30 billion pieces by end-2020.

The Thai manufacturer has a higher product mix of latex gloves, which will have a stronger impact on Top Glove compared to nitrile-heavy players like Hartalega and Kossan.

Sri Trang has also been cutting its average selling price to gain market share, putting pressure on its rivals.

PublicInvest said Hartalega might see margin compression in the coming quarters due to its premium pricing.

"We downgrade our rating on Hartalega and Top Glove to Underperform while Kossan is maintained at Neutral," it said.