A NOTABLE trend that applies very much across the glove industry today is that average selling price (ASP) is expected to peak and start declining in 2H 2021.
This is TA Securities Research projection of Hartalega Holdings Bhd’s ASP which is expected to drop 24% quarter-on-quarter (qoq) come its 2Q FY3/2022.
“In view of the softening ASP, customers have been adjusting their orders recently to manage the existing inventory cost,” opined analyst Tan Kong Jin in a company update following an investor briefing. “Post adjustments, management believes that the ASP decline would be moderated.”
To recap, Hartalega reported 4Q FY3/2021 net profit of RM1.12 bil (+11.7% qoq) due to higher ASP of circa 50% which more than offset 29% qoq decline in volumes as a result of closure of production lines due to COVID-19 infections at its plants.
Going into 1Q FY3/2022, however, TA Securities Research expects ASP to increase by circa 15% while volumes to grow by at least 35% qoq.
Bear in mind nevertheless that plant utilisation rates are currently at circa 70% due to full movement control order (FMCO) nationwide from June 1 to 28.
Considering that ASP has started to decline, the research house has lowered its target price for Hartalega by 29% to RM12.16/share (from RM17.12/share previously) while maintaining the company’s “buy” rating.
Likewise, Kenanga Research has also slashed Hartalega’s target price by 12.4% to RM13.80 (from RM15.76 previously) while retaining the glove maker’s “outperform” call.
“Due to the over ordering over the past 15 months since the pandemic started, the market is currently undergoing through a phase of inventory adjustment,” justified analyst Raymond Choo Ping Khoon.
“However, the management expects orders to creep up from August, hence does not expect excessive downwards pricing pressure.”
According to Kenanga Research, ASP trend is expected to soften albeit at a slower pace going forward as lead times have been reduced to between 90 to 120 days from 150 days previously.
“Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness,” opined the research house.
Citing the Malaysian Rubber Glove Manufacturers Association, Kenanga Research further expects the demand surge for rubber gloves to last beyond 1Q 2022 with growth rate averaging between 15% and 20% going forward.
At 9.10am, Hartalega was down 8 sen or 0.95% to RM8.35 with 233,700 shares traded, thus valuing the company at RM28.62 bil. – June 15, 2021
