SUPERNORMAL earnings for the glove sector are on their final legs while the anticipated normalisation has begun.
Such is how RHB Research summed up its “neutral” outlook on the rubber products sector with average selling price (ASP) moderation is largely priced in.
While share prices have fallen significantly of late as the market adjusts for the decline in ASPs, the research house believes the balance of risks remains tilted towards the downside at present.
“Should a steeper price war scenario play out, new entrants and smaller manufacturers are at higher risk of margin compression and possible losses,” opined analyst Sean Chew in a regional sector update.
RHB Research observed that selling prices of rubber gloves have fallen from the highs with current ASPs of nitrile and latex gloves ranging between US$40-45.00 (per 1,000 pieces) and US$30-35.00.
“In response, we trim our normalised price assumption per 1,000 pieces to US$27 for nitrile and US$21 for latex,” projected the research house.
“Our ASP assumptions are based on the expectation that prices will revert back to the cost-plus basis.”
The research house further expects Malaysian manufacturers to lose on market share should non-Malaysian manufacturers proceed with their aggressive expansion plan.
“Malaysian manufacturers may in turn react by continuing their expansion and possibly under-pricing their products,” noted RHB Research.
“Additionally, manufacturers are likely to prioritise clearing their high-cost inventory when ASPs trend south with prices overshooting downwards before settling at a higher equilibrium.
“As such, prices could fall below our expectations and pose a margin compression risk to our forecast.
“In the event where a steeper price war results in prices falling to cost-efficient levels, we believe this could prompt a further sector de-rating.”
Having collated publicly announced expansion plans by various manufacturers and conducted a supply and demand analysis, RHB Research does not expect an oversupply scenario to happen over the next two years although dynamics may be close to parity in 2023.
However, should sector capacity expansion be realised beyond their projected figures or demand increases to below 12% of their forecasted period, it would tilt the sector into an oversupply situation, according to the research house.
“Given the sharp moderation in share prices recently, we believe the aforementioned factors have largely been accounted for with domestic institutions heavily reducing their exposure for the past few months,” opined RHB Research.
“That said, we have yet to see value or catalysts to rerate the sector and the balance of risks still remain tilted towards the downside.”
All-in-all, the research house downgraded Comfort Gloves Bhd and Rubberex Corp (M) Bhd to “sell”, and Hartalega Holdings Bhd and UG Healthcare Corp Ltd to two to “neutral”.
Regionally, this makes up six “neutral” and two “sell” calls. – Sept 28, 2021
Pic credit: Reuters