LOOKING back at the 2Q 2021 reporting season, UOB Kay Hian Research has maintained its “underweight” stance on Malaysia’s glove sector premised on average selling prices (ASPs) having moderated slightly ahead of the research house’s expectations.
It now expects ASPs to normalise in mid-2022 as opposed to 2023 previously.
“Given that ASPs are no longer as lofty, downside risk from further disappointment is limited,” opined Philip Wong in a sector update. “That said, deferred capacity and sub-optimal utilisation rates are possible pressure points to the sector.”
Factoring in the softened ASPs alone, UOB Kay Hian Research said its earnings projections have already suggest significant downside to consensus expectations.
“Against this backdrop, there could be further downside to both sentiment and earnings going forward. Given the unfavourable reward-to-risk payoff, we suggest investors to minimise their exposure to the sector.”
Moving forward, the research house expects 3Q 2021 production output could be 25% lower due to pandemic restrictions on workforce. This is given throughout the movement control order (MCO), the Big-Four glove manufacturers – with their production footprint primarily located in Klang (Selangor) – were only operating with a 60% workforce capacity.
Subsequent to that, the glove manufacturers had to temporarily halt production altogether during the two-week enhanced MCO between July 3 and 16
“Given that 45% of Top Glove Corp Bhd’s production footprint falls outside of Selangor, the EMCO impact was less apparent for Top Glove,” observed UOB Kay Hian Research UOB Kay Hian Research. “It was only in mid-August did new guidelines allow increased operational utilisation.”
Subsequently, companies with >80% of its workforce being fully vaccinated would be allowed to resume 100% of production.
“From what we gather, this could be achieved by mid-September. We estimate production output for 3Q 2021 to be 25% below peak utilisation rates due to the various pandemic restrictions on labour workforce,” projected the research house. – Sept 8, 2021
