KUALA LUMPUR: While production volume for gloves may decline due to the reduced workforce in the latest round of the movement control order (MCO), the shortage in global supply could lend further support to glove pricing.
Glove manufacturers in Malaysia are allowed to operate during the MCO, which begins today till June 14, albeit only with 60% workforce.
The limit on workforce may likely lead to lower glove production output during the period, which, according to MIDF Research, could adversely impact their optimum production level by up to 2% if the MCO were to last for two weeks.
“That said, with proper planning, we think that the impact could be minimised. We also think that the companies are much more prepared this round following the outbreak that happened in their factories previously.
“As such, we believe that they are able to prevent (any further outbreak) through rigorous testing, isolation and intervention to ensure that any potential disruption risks to the operations can be reduced, ” said the research house in a report yesterday.
However, analysts noted that the reduction in the volume could extend beyond the initial two weeks of the MCO. CGS-CIMB pointed out that the implementation of another round of MCO could lead to further delays in the expansion plans of glove makers.
The brokerage had initially expected sector capacity to rise by 18.8% to 227 billion pieces per annum by end-2021 from 191 billion as at end-2020. With manufacturers already at full capacity, these delays may put further pressure on global supply.
However, CGS-CIMB was neutral on this possibility as it noted that the lower-than-expected production output due to the delays in expansion plans will be mitigated by a slower decline in average selling prices (ASPs).
“This is mainly due to an expected shortage in global glove supply as Malaysia currently contributes up to 65% of global glove supply. We estimate that total global glove supply reached 360 billion pieces in 2020, ” it said.
The research house added that glove makers may also take this opportunity to perform maintenance work on existing production lines. This will allow glove companies to ramp up production once the MCO is over.
Nonetheless, the reduction in volume is bound to hit glovemakers’ earnings. Based on back-of-the-envelope calculations, CGS-CIMB estimated that the 60% workforce for two weeks could see revenue forecast decline by 1.5% for the sector in 2021. Net profit forecast for the sector, meanwhile, is expected to decline by 2.4% assuming its ASP estimates remain.
Notably, local producers have also been facing challenges with the US Customs and Border Protection. Over the weekend, reports highlighted that a unit of Supermax Corp Bhd and Hartalega Holdings Bhd were under investigation over forced labour allegations. Both companies have maintained that they adhered to labour laws on treatment of migrant workers.
Glove counters were mostly in the red at yesterday’s close in line with the broader market.
Top Glove Corp Bhd bucked the trend with a 1.77% gain to close at RM5.18.
CGS-CIMB reiterated its “overweight” stance on the sector, with Hartalega and Kossan Rubber Industries Bhd as its top picks.
Hartalega and Kossan were last traded at RM9.00 (-2.17%) and RM4.05 (-1.46%), respectively.
“Despite our view that ASPs and earnings will peak in 2021, we believe that this is more than priced in based on current sector valuations.
The sector’s 2022 forecast price earnings ratio (P/E) of 9.3 times is currently at a 45.1% discount to the glove sector’s five-year historical mean P/E of 17.2 times.
“In addition, the sector’s 2021-2022F dividend yields of 5.1%-14.6% are attractive in our view, ” it said.