PETALING JAYA: The negatives of the rubber glove manufacturing industry have been largely priced in and glove stocks are now trading above their respective mean, indicating undemanding valuations.
Over the recent quarter, the rubber glove industry has weathered the worst, given the sharp deterioration in operational earnings per glove.
According to Kenanga Research, oversupply concerns appear overplayed, considering that most capacity expansions of rubber glove players are expected to be delayed and staggered.
“With rubber glove players becoming aware of the intense competition since four months ago, some of the measures taken to mitigate the impact of competition were slowing down of new capacity expansion, more measures to maintain margins through automation and other cost reduction initiatives, as well as intensifying sales efforts to penetrate emerging economies.
“Having experienced various cycles of oversupply, we believe players are now better at responding to competitive pressures.
“We see the average selling price (ASP) pressure problem in the sector fully sorting itself out within another quarter,” said Kenanga Research in a sector report, adding that there was a time lag of two months during pricing adjustments, before the cost increase could be shared out with customers.
The lack of meaningful capacity addition over the first half of 2019 would also allow demand to catch up with supply, suggesting that downside risk is limited and visibility should improve towards year-end.
In a recent strategy report, UOB KayHian said interest has drawn bottom fishing back into the sector, following the sector bottoming out against the backdrop of a strengthening US dollar.
Additionally, the sector is being perceived as a trade diversion beneficiary.
“Sector valuations are reasonable, trading slightly above the forward mean price-earnings multiple of 23 times. This is backed by a decent two-year earnings compound annual growth rate of 9% over 2019 to 2020.
“While it is not exciting growth, lack of proven and dependable growth ideas in other sectors may force portfolio managers to maintain shelter in this increasingly palatable space, in terms of valuations and prospects,” said UOB KayHian.
The research house opined that there would be limited spillover benefits from the US-China feud to the Malaysian glove manufacturers, as vinyl and nitrile gloves are not close substitutes. Instead, it is the China-produced nitrile gloves that are under threat.
This would mean that China’s nitrile glove supply would shift elsewhere in search of more equitable competing grounds.
UOB Kay Hian’s top pick for the sector is Kossan Rubber Industries Bhd, which offers most visibility in terms of capacity expansion, with growth of 43% in the near term, partly due to a low base.
Meanwhile, Hartalega Holdings Bhd is Kenanga Research’s top pick, backed by the group’s highly automated production processes model, which yields better margins and cost reductions, booming nitrile glove segment, and innovative product development.
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