IF it ever contributes positively to the rubber glove sector, the Omicron COVID-19 variant is likely to boost sales volume rather than average selling prices (ASPs).
RHB Research opines that the emergence of the new variant does not mean a reset to 2020 because:
- A majority of the global population is no longer immune-naïve;
- Policymakers and their respective healthcare systems are better prepared and equipped;
- Shorter turnaround time to develop variant-specific vaccines;
- Most countries have accelerated their booster shot policy and expanded vaccine access to lower-aged groups; and
- Major manufacturers have undergone significant expansion plans and are currently running at below optimal utilisation rates.
“Despite consensus earnings expectations remaining elevated as some have yet to account for the latest ASP and demand trends, we believe the market has already priced in the earnings weakness ahead of consensus,” analyst Sean Chew pointed out in a glove sector update.
“While value has emerged for certain names, the balance of risks is still tilted towards the downside, and we do not foresee any immediate catalysts/value that would lead to a re-rating of the sector.”
Reiterating a “neutral” outlook on the glove sector with Kossan Rubber Industries Bhd being its top pick (“buy”; target price: RM2.05), RHB Research observed that glove manufacturers have noted ASP erosion, slowing from the current US$28-US$30/1,000 pieces with operating margins coming close to pre-pandemic levels.
“For the immediate term, the risk of the price war intensifying has toned down – given capacity restrictions and the energy crunch that is on-going in China,” suggested the research house. “However, we do not exclude the possibility of the price war risk worsening, once the situation normalises.”
Meanwhile, Kenanga Research downgraded the glove sector to “neutral” from “overweight” taking the cue from Top Glove Corp Bhd’s latest results briefing and in tandem with industry-wide ASP and margin slide.
“The recent round of reporting season for glove makers suggest that the ASP and margin trends have softened faster-than-expected and will likely continue to remain weak over the next two quarters,” noted analyst Raymond Choo Ping Khoon.
“Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment signalling an acceleration in overall market ASP normalisation.”
While falling further, glove manufacturers are of the view that ASP is unlikely to go below pre-COVID pricing considering that the cost structure has risen among others, including social compliance costs and the still stubbornly high nitrile feedstock cost.
Kenanga Research’s current ratings are as follows: Hartamas Holdings Bhd (“outperform”; target price: RM7.50); Top Glove (“market perform”; target price: RM2.05). Kossan (“market perform”; target price: RM1.80); and Supermax Corp Bhd (“market perform”; target perform: RM1.45). – Dec 27, 2021
