Kenanga Research said it is still a buyer’s market with low industry utilisation of about 40%.
PETALING JAYA: Kenanga Research remained “underweight” on the glove sector as overcapacity in the industry will continue dragging the glove players to face weak demand and high input costs.
“While some players have returned to the black since the third quarter of calendar year 2023 (3Q23), albeit with only some small profits, we believe the sector will continue to face volatile earnings ahead, no thanks to weak demand and stubbornly high nitrile butadiene rubber prices.
“The industry expects volatile quarterly sales orders as distributors and buyers see no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available,” it said.
The research house pointed out that the industry was cautious about raising prices by fully passing on the higher input cost given the still competitive landscape in the industry.
As such, it would be challenging for glove makers to raise average selling prices (ASP) over the immediate term.
The research house added that it is still a buyer’s market with low industry utilisation of about 40%.
It said there was a slight sequential weakening in earnings delivery against its expectations by the sector in the recently concluded 4Q23 reporting season.
“Out of the four companies under our coverage, only one beat our forecast (Kossan Rubber Industries Bhd
), while two came in within (Hartalega Holdings Bhd and Topglove Corp Bhd) and one disappointed (Supermax Corp Bhd),” the research house added.
It said while Kossan and Hartalega posted a second consecutive quarterly profit, their 4Q23 bottomline was lower quarter-on-quarter, dragged down by subdued sales volume and sustained high input nitrile butadiene rubber price.
Meanwhile, Supermax and Topglove suffered their fifth and sixth consecutive quarterly losses, respectively, due to sale of high-priced inventory at falling market prices, subdued sales volume coupled with lower overhead absorption on the back of less-than-optimum utilisation rate.
Going into 2024, Kenanga Research highlighted that the operating environment remained challenging with no V-shaped recovery and lofty valuations.
It explained that local players were plagued by predatory pricing by certain overseas players, which were selling below cost over an extended period of time to eliminate competitors.
On a slightly brighter note, Kenanga Research said further decommissioning of older production facilities locally should help to ease supply pressure, bringing about more rational competition amongst local players.
“Following a premature run-up in their share prices, we avoid all names under our coverage, namely Hartalega, Kossan, Supermax and Topglove,” it added.
Nevertheless, the research house believed the demand-supply situation will only start to head towards equilibrium in 2026 when there is virtually no more new capacity coming onstream.
It added that the global demand for gloves is expected to rise by 15% annually underpinned by rising hygiene awareness.
“We project the demand for gloves to rise by 30% in this calendar year to 390 billion pieces (due to a low base effect in the last calendar year) and resume its organic growth of 15% thereafter.
“Our calendar year 2024 forecasts assume an ASP per 1,000 pieces of US$20, similar to last year, and an average plant utilisation of 45% versus an estimated 40% last year,” Kenanga Research added.
