PETALING JAYA: While glove stocks have been able to hold on to much of the price gains made in the past four trading weeks, analysts remain unconvinced, noting sector fundamentals show no signs of recovery.
CGS-CIMB Research, in a report yesterday, stated even if the local rubber glove makers may enjoy translation gains on the weaker ringgit against the US dollar, the oversupply and weak demand from buyers remain core factors that will continue to dampen outlook of the rubber glove sector.
“Our channel checks with glove makers indicate continued weak demand as there has been no increase in orders despite the emergence of new Covid-19 variants (XBB, BQ.1 and BQ.1.1). Glove makers are also reporting that the utilisation rate remains low at 50% to 55%,” said CGS-CIMB Research.
Moreover, glove manufacturers are having a hard time implementing price hikes in the midst of high input costs, on the back of the present supply-led industry dynamics, it noted.
“We expect average selling prices (ASPs) to stabilise at US$20 to US$21 (RM94.42 to RM99.14) per 1000 pieces (below pre-pandemic levels), with slow recovery anticipated in the mid-term of three to six months,” CGS-CIMB Research added.
Although manufacturers have slowed capacity expansion plans in response to the weakening demand and oversupply in the industry, the research house anticipates that it will take at least one to two years for inventory levels to normalised, and glove makers’ earnings recover to pre-pandemic levels.
“Industry dynamics remain supply-led, with slow demand and an abundance of supply commissioned during the peak of the Covid-19 pandemic. In our view, the oversupply situation would require at least one to two years to abate,” said CGS-CIMB Research.
With institutional selling pressure abated, investors, short of trading ideas, bought glove makers like Top Glove Corp Bhd
, Hartalega Holdings Bhd, Supermax Corp Bhd, Kossan Rubber Industries and Careplus Group Bhd after their share prices hit six to eight-year lows.The counters share price have rallied by 20% to 30% in the process.
Despite weaker demand and loss of pricing power, glove makers remain financially strong with CGS-CIMB Research noting cash flow requirements of glove firms’ in the longer term are secure given their strong net cash positions. This is also supported by the slowing down of expansion and capital expenditure spending plans of glove manufacturers.
“Supermax has the highest net cash position among its peers of RM2.8bil as at the end of the second quarter of 2022. However, it has also earmarked RM1.6bil for its US glove plant which we estimate to be completed in the second half of 2023,” said the research house.
CGS-CIMB Research nevertheless ascribed a “underweight” call on rubber glove stocks like Supermax, Top Glove, Hartalega and Kossan with a lower target price (TP).
It lowered the TP of Supermax and Top Glove to 50 sen each on expectations the companies might continue to post quarterly losses as their earnings have not yet bottomed on a quarterly basis.
“For Hartalega, its share price is below our TP of RM2.30 and currently has a “reduce” call. We have a “hold” call on Kossan with a TP of RM1.38. Still, we note there could be further downside risks to our earnings forecasts for both stocks if ASPs do not recover,” said CGS-CIMB Research.
Top Glove shares closed 1.5 sen lower at 72.5 sen in active trade yesterday, while Hartalega settled eight sen lower at RM1.84 and Supermax four sen easier at 84.5 sen. Kossan ended the trading day two sen lower at RM1.14.
The research house stated the weaker ringgit and the emergence of new Covid-19 variants could potentially result in a re-rating of the sector.
