GLOVE makers will have to grapple lower production output even as they are allowed to operate during ‘total lockdown’ period from June 1 to 14, given they can only function with 60% workforce.
Nevertheless, CGS-CIMB Research expects glove makers to be able to mitigate the situation by allowing only essential staff to be utilised in processes that are more manual labour-intensive such as packing and stripping.
“Also, we believe that glove makers may take this opportunity to perform maintenance work on existing production lines,” opined analyst Walter Aw in a sector update. “This will allow glove companies to ramp up production once the movement control order (MCO) is over.”
More broadly, the research house opined that the implementation of another round of MCO will lead to further delays in the expansion plans of glove makers under its coverage.
CGS-CIMB Research has expected the sector’s capacity to rise by 18.8% to 227 billion glove pieces per annum by end-2021F from 191 billion (as of end-2020).
“(This) may lead to lower-than-expected production output vs. our current forecast but this will be mitigated by a slower decline in average selling prices (ASPs),” projected the research house.
“The latter is mainly due to an expected shortage in global glove supply as Malaysia currently contributes up to 65% of the global supply (we estimate that total global glove supply reached 360 billion pieces p.a. in 2020).”
Based on its back-of-the-envelope calculations, CGS-CIMB Research expects a 1.5% decline in its CY2021 revenue forecast for every two weeks the current round of MCO is in place, while its sector’s CY2021 net profit forecast will decline by 2.4%.
All-in-all, the research house reiterated its “overweight” outlook on the glove sector with Hartalega Holdings Bhd and Kossan Rubber Industries Bhd as its top picks.
“Despite our view that ASPs and earnings will peak in CY2021F, we believe that this is more than priced in based on current sector valuations,” justified CGS-CIMB Research. “In addition, the sector’s CY2021-2022F dividend yields of 5.1%-14.6% are attractive.”
According to the research house, all target prices of glove companies under its coverage are based on CY2023F price-to-earnings ratio (P/E) to better reflect a more balanced supply-demand environment as it expects more normalised ASPs from 2023F onwards. – May 31, 2021
