Hartalega Holdings Bhd’s shares fell 35 sen or 12.5% to RM2.45, erasing some RM1.2bil in market capitalisation, with the stock now trading at five-year lows as investors digested its 96% year-on-year (y-o-y) drop in earnings for its second quarter. Top Glove Corp Bhd fell five sen or 5.6% to 93 sen which erased RM400mil of its market value as its shares hit values last seen five years ago.
PETALING JAYA: Glove makers came under fresh selling pressure yesterday on bearish demand-supply fundamentals as analysts warn a glut in the world market is set to pressure average selling prices (ASPs) further as Chinese glove makers push for market share.
Local glove makers are now caught in a perfect storm of falling demand, lower pricing power and a jump in supply and production capacities that are hitting margins hard.
Hartalega Holdings Bhd
’s shares fell 35 sen or 12.5% to RM2.45, erasing some RM1.2bil in market capitalisation, with the stock now trading at five-year lows as investors digested its 96% year-on-year (y-o-y) drop in earnings for its second quarter.
Top Glove Corp Bhd fell five sen or 5.6% to 93 sen which erased RM400mil of its market value as its shares hit values last seen five years ago.
Supermax Corp Bhd shares ended three sen lower at 82 sen, losing RM80mil in market capitalisation. At its current price, Supermax shares are trading at two-year lows.
The sharper fall in Hartalega shares is partly due to the Employees Provident Fund being a net seller of the stock, an exchange filing by the company showed.
CGS-CIMB Research continues to like Hartalega for its industry-leading margins and technology advantage in nitrile gloves.
Analyst reports yesterday stated that industry players were set to face challenging times ahead following declining utilisation rates and softening ASPs amid the weak global demand.
This is reflected in Hartalega’s 96% y-o-y core net profit drop to RM88.3mil for the first quarter of financial year 2023 (1Q23) results.
It missed most estimates due to lower-than-expected ASPs from the supply glut in the global glove sector.
According to CGS-CIMB Research, Hartalega is expected to post sequentially lower earnings in the next three quarters.
“We gather global glove demand is still weak, with customers keeping low inventory levels. There is also an abundance of supply in the market.
“Glove makers, especially from China, are lowering their ASPs to be competitive in the market,” it said in its note to clients yesterday.
The research house also expects local glove makers to lower their ASPs to remain competitive in the near term.
Having said that, CGS-CIMB Research expects Hartalega’s ASPs to stabilise by 3Q23 at US$22-US$24 (RM98-RM107) per 1,000 pieces versus US$26-US$27 (RM116-RM120) in 1Q23.
The research house has lowered its financial year 2023 (FY23) to FY25 earnings per share (EPS) estimates on Hartalega by 48.2% to 75.9%.
This is to account for higher input costs, lower ASPs and a slowdown of its expansion plans in view of the current oversupply in the glove sector, it added.
Overall, CGS-CIMB Research has forecast Hartalega’s net profit to decline 96% in FY23 before growing 86% in FY24 and 41% in FY25.
The research house has downgraded the stock to a “reduce” with a lower target price of RM2.30 in tandem with its EPS cut.
“In our view, current valuations of 45.7 times for calendar year 2023 (CY23) price-to-earnings ratio (PE) have yet to account for the weaker-than-expected earnings prospects ahead,” it noted.
However, CGS-CIMB Research continues to like Hartalega for its industry-leading margins and technology advantage in nitrile gloves.
Meanwhile, Hong Leong Investment Bank (HLIB) Research pointed out that Hartalega’s management is expecting the utilisation rate to decline going forward. The current utilisation hovers around 50% to 60% in view of intense market competition.
The ASPs are also expected to persist at a low US$20 (RM89.14) per thousand gloves in the near term.
Also, Hartalega’s Next Generation Integrated Glove Manufacturing Complex or NGC 1.5 that was scheduled for commissioning in October has been postponed, while expansion plans would only be revived when the market situation improves.
The group has also decommissioned some of its older plants to reduce its overall installed capacity and operating cost.
Top Glove and Hartalega could be at risk of being booted out of the FBM KLCI list in the upcoming semi-annual review. Hartalega is currently ranked at the 35th spot based on the Aug 9 closing while Top Glove’s current market capitalisation of RM7.53bil could also cost it its spot in the benchmark.
According to the index ground rules, constituents could potentially be removed from the index if they fall below the 35th spot, added the research house.
HLIB Research noted a further selldown might be triggered if the constituent change materialises. It has maintained a “sell” call on Hartalega with a target price of RM1.92.
It added, “We trimmed our FY23-FY24 earnings forecasts by 18%-24% as we lowered our utilisation rate to 63% in FY23 and 73% for FY24.”
However, HLIB Research has also introduced Hartalega’s earnings forecast of RM575mil for FY25.
