Glove makers continue to face earnings pressure

Apex Research said the oversupply situation facing the glove industry is expected to continue into the calendar year 2023.

PETALING JAYA: Hartalega Holdings Bhd’s results, which slipped into the red in the third financial quarter ended Dec 31, 2022 (3Q23), indicate that glove makers will continue to face headwinds in the post-pandemic era.

In 3Q23, Hartalega posted a net loss of RM31.9mil compared with net profits of RM28.3mil in the previous quarter and RM259.6mil a year ago.

Revenue fell 21% quarter-on-quarter or more than half year-on-year to RM461.8mil.

Analysts note that the group’s margin was also hit by higher operating costs as natural gas tariffs had increased by 25%.

Apex Research said the oversupply situation facing the glove industry is expected to continue into the calendar year 2023. The imbalance in supply and demand in the market was due to the aggressive expansions of the players, coupled with customers’ stockpiling activity.

“However, we were guided that the fall will be cushioned, as some of the major players have announced to postpone their expansion plans as well as the exits of new entrants,” it said in a report yesterday.

Moving forward, Apex said the group’s management anticipates that there would be an increase in energy, as well as raw materials costs.

As such, the pressure on operating margins would continue to hit amid the current moderation of average selling prices or ASPs to US$20 (RM86) per 1,000 pieces.

It noted that continuous global oversupply situation has resulted in the industry operating at sub-optimal utilisation level, resulting in Hartalega decommissioning its third manufacturing plant.

In light of the higher operating cost and competition, Apex has reduced Hartalega’s FY23 and FY24 bottom line forecast by 41.2% and 12.3% to RM122.2mil and RM267.4mil, respectively.

It has also downgraded the stock to a “sell” with a target price of RM1.40 (from RM1.94 previously).

However, the research house said the group continues to emphasise better cost management, improve operational efficiencies and scale up its automation activities.

Similarly, other research firms had also reduced their full-year earnings forecast for Hartalega. Most firms had a “sell” or “hold” call on the stock too.

Maybank Investment Bank (Maybank IB) Research said the group is unlikely to turn around in the near term.

According to Maybank IB, Hartalega’s management remains cautious on the industry outlook due to stiff competition.

“Hence, we believe losses will continue over the next quarter, at least,” it added.

To cover part of the higher costs, Hartalega is trying to raise selling prices, but Maybank IB said this may not be successful given the stiff competition and excess supply in the market.

Going forward, it said the group was looking to diversify its income stream by strengthening its distribution business, which now accounts for 8% of total revenue.

“Hartalega is also looking to set up manufacturing facilities outside of Malaysia for risk diversification while efficiency/cost rationalisation exercise is ongoing,” Maybank IB said in its report following a conference call with the group’s management.

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