Higher and higher earnings

Hartalega Holdings Bhd and Supermax Corp Bhd posted all time high figures in their results on Tuesday, paving the way for their Big Four counterparts – Top Glove Corp Bhd and Kossan Rubber Industries Bhd – to report the similar profits in December and November respectively.

PETALING JAYA: The earnings of two giant rubber glove producers have set the tone for the incredibly high profits the industry players are about to record and also how they will fare in the upcoming quarters.

The rubber glove sector will be the best performing until next year but the big question mark is the ability of the companies to sustain that level of earnings into the coming years.

Hartalega Holdings Bhd and Supermax Corp Bhd posted all time high figures in their results on Tuesday, paving the way for their Big Four counterparts – Top Glove Corp Bhd and Kossan Rubber Industries Bhd – to report the similar profits in December and November respectively.

This is no surprise because demand and average selling prices (ASPs) have yet to peak as the number of Covid-19 cases continued climbing alongside no solid news of a vaccine.

As the market began to gauge the sustainability of rubber glove makers’ earnings moving into 2021, Supermax noted a crucial point in its earnings announcement – that its ASPs were continuing to trend upwards and the highest ASPs have not been reflected for the quarter ended Sept 30.

Analysts have been expecting ASPs to peak and remain elevated throughout next year, with a potential of them being recalibrated in 2022.

MIDF Research analyst Ng Bei Shan told StarBiz that other top producers are likely to clock in higher results due to the higher ASPs.

“The upcoming quarters may still be stronger quarter-on-quarter (q-o-q). The last we checked, orders for some players were taken up until the end of 2021, indicating strong demand, ” she said.

An update on the sector by her last week said supply for medical gloves remained tight and ASPs were still on an upward trajectory, with chances of them rebalancing in 2022. However, demand would remain sturdy due to the industry’s organic growth.

She was of the view that glove producing companies would continue beating their own records with the projection of 40% to 50% hike in ex-factory prices in the final quarter of the year.

Ng also pointed out that the supply-demand imbalance may continue for three to four years, premised on the increasing demand from developed nations by 30% and 100% in developing nations.

“The shortage in raw material supply and manpower supply locally will also limit the growth in rubber glove production expansion.

“Organic growth for demand is also expected to exceed the 8% to 10% expected before the pandemic, ” she said, adding that growth in demand for rubber gloves was due to changes in hygiene habits and the expected increase in gloves used per capita among developing nations.

Ng said there is a wider adoption of glove usages from industries other than the medical industry, such as the food and beverages, government agencies and services industry including beauty and grooming.

Once the growth in ASP tapers off, she said the profitability of the industry players will rely on production efficiency and cost management again.

Areca Capital chief executive officer Danny Wong (pic below) held on to his view that the glove industry is here to stay, during and post-Covid.

He said the profits of Hartalega and Supermax jumped multiple times as expected and these levels would be sustained next year.

Asked if the ASPs would remain elevated with emergence of new players, Wong remained positive.

“We don’t think that the new entrants can pose any challenge to the established players before they build their credibility, branding and financials, ” he said.

CGS-CIMB Research said, in its note on Supermax yesterday, that it expected ASPs to peak next year.

It added that Supermax’s current order book visibility has been extended to end-2021 and its customers were willing to pay higher ASPs and deposits of 30% to 50% to secure the glove supplies.

“Supermax continues to benefit from its business model, where it distributes its original brand manufacturer products via in-house distribution centres and independent distributors. This allows it to capture two streams of income, both manufacturing and distribution, ” the research house said.

CGS-CIMB also said that Hartalega’s ASPs lagged significantly behind its peers, noting that it should be able to raise it by a higher quantum to be more sustainable in the longer term.

It gathered that Hartalega aimed to raise its ASPs by 50% this quarter, with a possible hike next quarter.

“Based on its internal study, Hartalega estimates the current global glove shortage at 120 billion pieces annually.

“It expects this situation to be resolved only in 2024, when new capacity would finally be sufficient to offset the increase in glove demand, ” it said.

On a side note, there seems to be a mismatch between the optimism surrounding rubber glove makers and their share prices.

Investors took profit yesterday following the Tuesday rally ahead of the results announcements by Hartalega and Supermax.

Rubber glove counters have been going through extreme price volatility since last week, which has been linked to news of potential development of vaccines and also the upcoming maturity of structured warrants on rubber glove stocks.

Commenting on the volatility, Wong said it would remain as such as the market believed that the successful development of a vaccine was imminent.

Supermax lost 33 sen to RM9.45 yesterday while Top Glove was down 13 sen to RM8.78. Hartalega shaved 26 sen to RM18.02 and Kossan closed two sen lower at RM7.50.

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gloves , Bursa , earnings , Hartalega , Supermax , Top Glove , Covid-19 ,


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