Glove sector on the mend

“The worst is over for glove players but they are not out of the woods yet.," Rakuten's Lau said.

PETALING JAYA: Glove counters are on the rise after Hartalega Holdings Bhd posted better quarter-on-quarter results which saw the nitrile glove maker returning to the black with a net profit of RM27.7mil in the second quarter of financial year 2024 (2Q24) as compared to a net loss of RM52.5mil in 1Q24.

Hartalega was up 2.6% to close at RM2.39, Kossan Rubber Industries Bhd rose 3.5% to RM1.47, Top Glove Corp Bhd increased 1.3% to 79 sen while Supermax Corp Bhd gained 1.2% to close at 84.5 sen.

Hartalega’s revenue rose 2.7% quarter-on-quarter (q-o-q) to RM452.1mil, mainly driven by higher sales volumes of 8%, mitigating the lower average selling price (ASP) of 4%.

The company also saw lower operating costs and aided by ongoing operational rationalisation exercise of Bestari Jaya facility. Overall, plant utilisation rate rose to 44% versus 41% in 1Q24.

Given the heightened interest in glove stocks, does this mean that the worst is over for these players?

“The worst is over for glove players but they are not out of the woods yet. They appear to be on the mend on a quarterly basis and should be able to maintain their profitability in subsequent quarters,” Rakuten Trade head of equity sales Vincent Lau told StarBiz.

However, he pointed out that the glove oversupply situation will continue to weigh on glove maker’s share price as China continues to ramp up production and is fast gaining market share in the glove industry, which is currently dominated by Malaysian producers with over 200 billion pieces annually.

He said the oversupply situation to only head towards equilibrium next year or 2025 when there is no more capacity coming onstream while global demand for gloves continues to grow.

The positive share price movement was mainly due to increased trading activities of glove counters as traders believe these stocks are cheaper to buy now, Lau added.

That said, Hartalega is sitting on a pretty healthy cash balance of RM1.6bil as at Sept 30, 2023 while Kossan and Supermax have RM1.2bil and RM2.1bil cash and bank balances respectively as at June 30.

However, Top Glove has seen depleting cash and bank balances, which stood at RM290mil as at Aug 31, 2023 compared with RM437.6mil a year ago.

“Hartalega, Kossan and Supermax are in a strong cash position, enabling them to better position themselves amidst the challenging times. As for Top Glove, it has been using its cash for aggressive share buybacks,” notes an analyst.

AmInvestment Bank Research is positive on Hartalega, upgrading its call to a “buy” from “sell” previously with a higher fair value of RM2.80 per share from RM1.40 previously.

“Our valuation is based on a calendar year 2025 price earnings of 26 times, at parity to Hartalega’s 10-year average, revised from price to book value methodology given that Hartalega could register sustainable earnings in the coming years,” it said.

It pointed out that the stock is trading at an attractive calendar year 2025 price earnings of 22 times, which is a 15% discount to its 10-year average of 26 times.

The brokerage firm added that it turned positive on the counter mainly due to the company’s fundamental and fund flows.

“Hartalega achieved a better-than-anticipated first half financial year result with two consecutive q-o-q improvements in core earnings before interest and tax (Ebit).

“Hartalega further guided for sales volume to improve in the coming quarters with a target to achieve a 30% increase to six billion pieces in 4Q24 from 4.6 billion pieces in 2Q24, which could provide additional economies of scale despite a lower pricing environment,” AmInvestment research said.

It added that Hartalega distinguishes itself as the lowest cost Malaysian glove-maker among local peers, suggesting that it will be the first to benefit from any demand recovery and deliver pre-pandemic profit for a full financial year.

“We are confident that this will convince investors to value Hartalega at a premium with a rolled forward calendar year 2025,” the research house said.

It added that the positive deviation was mainly attributable to higher revenue, lower raw material prices and cost savings primarily from the decommissioning of the less-efficient Bestari Jaya facility.

As such, it reversed financial year 2024 (FY24) into a profit of RM94mil mainly to account for the lower cost structure and higher sales volume.

AmInvestment research also raised FY25 to FY26 earnings to RM263mil, RM406mil from RM129mil and RM237mil after factoring in lower cost structure and higher sales volume.

“We project Hartalega’s earnings to continuously improve on a q-o-q basis, underpinned by a lower cost structure as a result of economies of scale and customer replenishment cycle early next year that could allow Hartalega to regain pricing power to offset the potential increase in natural gas cost,” it added.

However, the research house said its projections do not account for Chinese players expanding capacity irrationally and further depressing ASP.

Meanwhile, Hong Leong Investment Bank (HLIB) Research is more cautious as it expects demand to remain soft given the ongoing oversupply situation.

There could be added pressure on margins as Hartalega is likely to maintain its ASP at current levels despite the price of raw material nitrile butadiene rising since September, the research house said.

This comes amid a downtrend in ASP in the sector, which HLIB Research anticipates will continue into 3Q24.

However, Hartalega’s management indicated an increase in orders in 3Q24, which could be a sign that the excess inventories of buyers are slowly depleting.

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