Hartalega's plant closure a negative sign for gloves

KUALA LUMPUR: The shuttering of Hartalega Holdings Bhd's Bestari Jaya plant could be a sign of deteriorating prospects in the local glove sector.

Hartalega announced in a statement yesterday that the decommissioning exercise will lead to an impairment loss of RM347mil in FY23 and further provision for retrenchment costs and expenses of RM70mil in FY24.

Post-announcement, investment research firm Kenanga Research revised its FY23 forecast for Hartalega to a net loss of RM33mil, down from a net profit of RM24mil previously.

It also tripled its forecast for Hartalega's net loss in FY24 to RM82mil.

Reiterating its "underperform" recommendation, Kenanga slashed Hartalega's target price to RM1.30 from RM1.35 previously, based on a sharper 50% discount to the sector's average of 1.7x book value per share charted during previous downturns in 2009-2011 and 2015-2015.

The research firm said its new forecast reflects its belief that the downturn will go on for longer and deeper than initially thought.

According to Kenanga, the decommissioning of the facility, which houses 30% of Hartalega's total capacity, could be the first sign of "something major" to befall the sector amid the massive industry overcapacity.

The research firm expects the overcapacity situation in the rubber glove industry to persist over the next two years, with the demand-supply situation only starting to head towards equilibrium in 2025.

It is a more pessimistic view than that taken by the Malaysian Rubber Glove Manufacturers Association (Margma), which expects a return to balance in the next six to nine months.

"Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness," said Kenanga.

However, it said global glove production capacity is expected to rise a further 16% to 595 billion pieces during the year as incumbent and new players had made capacity expansion plans during the pandemic years, which are finally coming online.

"Not helping the already dire situation is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of a further decline in prices," it added.