Glove makers like Top Glove Corp Bhd have moved to control output by lowering plant utilisation rates to about 50% of capacity and put on hold or delayed the commissioning of new plants, says RHB Research.
PETALING JAYA: Glove makers continue to face headwinds as the industry’s bearish demand-supply fundamentals are not expected to change till mid-2023, before anticipated restocking activities by buyers enable improvement in average selling prices (ASPs).
RHB Research, which remains “underweight” on the sector, said rubber glove industry players are still unable to ascertain the timing of inventory normalisation from the glove distributors’ point of view.
“Under a bull-case scenario, we expect glove distributors’ inventory levels to normalise by the first half of 2023 (1H23). Our recent takeaways from the results briefings suggest an absence of restocking activities from the distributor front.
“As such, our assumption for 1H23 inventory normalisation stands,” the research house said in a report on the sector.
The rise in Covid-19 infection numbers in China following the relaxation of its harsh zero-Covid policy recently has attracted some speculative interest from investors into the sector stocks.
But from a fundamental perspective, RHB Research believes the earliest entry point might appear towards late 1H23, as glove distributors’ inventory levels eventually come to an end and result in re-stocking activities.
“From our checks with investors, we gather that they are keeping an eye on the normalisation of plant utilisation rates, which otherwise suggest gradual improvements in demand – as a key sector re-rating catalyst before placing bets on the glove sector,” it stated.
As it stands, glove makers like Top Glove Corp Bhd
have moved to control output by lowering plant utilisation rates to about 50% of capacity and put on hold or delayed the commissioning of new plants.
The lower capacity is set to result in a drag on margins of the glove makers who posted disappointing quarterly results recently that were below analysts expectations.
RHB Research said the industry’s ASP is currently US$20 to US$22 (RM88 to RM97) per 1,000 pieces, similar to levels recorded prior to the Covid-19 pandemic.
The decline in ASPs in the third quarter eased to a low-single-digit level quarter-on-quarter, which suggests ASPs may have bottomed.
“Nonetheless, the pace of ASP moderation continues to ease, notwithstanding the impending price war from Chinese peers,” RHB Research added.
The 25% higher gas tariff rates from October are expected to weigh on the glove makers’ profitability, moving forward, but offset somewhat by lower raw material prices (30% to 40% of total costs) of nitrile and latex.
Glove makers, however, are facing a problem of passing on higher costs to buyers due to the demand-supply imbalance.
From a balance sheet perspective, RHB Research said Supermax Corp Bhd’s net cash balance of RM2.7bil is 11% above its market capitalisation.
But if its planned US$350mil (RM1.55bil) investment in the United States is added, its total net cash as a percentage of market capitalisation falls to 51%.
Kossan Rubber Industries Bhd’s net cash over market capitalisation ratio stands at 42%, while Top Glove at 7.3% and Hartalega Holdings Bhd at 28.5%.
Due to the uncertainty about glove makers’ profitability in 2023, RHB Research has changed its valuation technique to price-to-book value (P/BV) from price-to-earnings (PE).
At this juncture, the research house said sector valuation had tumbled to its trough at 0.8-times P/BV or minus 1.6 standard deviation (SD) below five-year mean of four times.
“Top Glove, Hartalega, Kossan and Supermax’s P/BVs were trading at minus 1.3, minus 1.6, minus 1.9 and minus 0.9 SD below their respective means.
“We believe the balance risks may still tilt towards the downside for the glove industry, given the various headwinds mentioned,” it added.
