KENANGA Research has further downgraded Bursa Malaysia’s glove sector to “underweight” from “neutral” as indications from its supply-demand analysis are pointing towards excess capacity spanning the next two years.
Hence, the research house foresees the weak operating environment to continue to weigh down the financial performance of glove makers over the medium- to long-term.
“Specifically, industry leader Top Glove Corp Bhd’s recent results have indicated weaker earnings ahead for glove makers, suggesting that earnings have yet to bottom out,” observed analyst Raymond Choo Ping Khoon in a sector update.
“This is due to crimped margins arising from the mismatch between ASP (average selling price0 and inability to fully past cost through, further exacerbated by low industry plant utilisation averaging 50-60% which appears to likely persist over the medium term.”
According to Kenanga Research, the situation is further aggravated by softening demand as evident from the low utilisation rate of glove players leading to oversupply putting pressure on ASP coupled with customers’ reluctance to commit to sizeable orders as they expect selling prices to ease further.
“We expect ASP to remain in the doldrums in 2H 2022,” projected the research house.
“As a result of massive capacity expansion by incumbent players as well as new players during the pandemic years – enticed by the super fat margins that had eventually evaporated – we estimate that global glove manufacturing capacity has jumped by 22% to 511 billion pieces in 2022.”
As more countries come out the other end of the pandemic, Kenanga Research expects global demand for gloves to ease by 10% in 2022 to 387 billion pieces (partly also due to the destocking activities along the distribution network).
“This will thus result in an excess supply of 124 billion pieces (assuming, hypothetically, capacity utilisation is maximised),” suggested the research house.
“In 2023, we estimate the global glove manufacturing capacity to surge by another 16% to 595 billion pieces (as more capacity planned during the pandemic years finally comes on-line).”
Based on its projection, Kenanga Research expects the demand-supply situation to only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming on-stream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.
Below is the research house’s outlook on the Big Four glove makers:
- Hartalega Holdings Bhd: Downgrade to “market perform” (from “outperform” previously) with a much lower target price of RM2.90 (from RM5.60 previously).
- Top Glove: Maintain “underperform” with a lower target price of 80 sen (from 95 sen previously).
- Kossan Rubber Industries Bhd: Reiterate “underperform” with a lower target price of RM1.20 (from RM1.60 previously).
- Supermax Corp Bhd: Retain “underperform” with a lower target price of 65 sen (from 75 sen previously). – June 23, 2022
