AGAINST the backdrop of lower sector’s earnings projections for FY2021-2024F by 10%-51%, on the back of lower average selling price (ASP) assumption, PublicInvest Research has downgraded its outlook on the glove sector to “neutral” from “overweight” previously.
On the same note, the research house has also downgraded its rating for Kossan Rubber Industries Bhd to “neutral” (from “buy” previously) while maintaining its “neutral” call on Top Glove Corp Bhd.
“Our preferred exposure for the sector is Hartalega Holdings Bhd due to its superior margins pre-COVID and we continue to rate it as ‘outperform’,” opined analyst Chua Siu Li in a sector update.
Elaborating on the sector as a whole, PublicInvest Research expects ASPs to start declining in 2H CY2021.
This is given the COVID-19 situation in both the US and European Union region has greatly improved following the roll-out of vaccines, hence lessening the urgency for distributors to immediately replenish inventories back to its usual two to three months level.
At the moment, the research house has been made to understand that the distributors’ current inventory levels are at circa one month with buyers adopting a wait-and-see approach to avoid locking-in purchases at high-prices.
“On a side note, Top Glove is redirecting its capacity earlier allocated for the US to EU market, thus causing stiffer competition for glove makers in the EU currently,” observed the PublicInvest Research.
“The improved COVID-19 situation in both the US and EU as well as stiffer competition in EU will lead to lower glove ASPs in 2H CY21 in our opinion.”
Moreover, lead time has fallen for both Hartalega and Top Glove, both at less than 120 days currently from 150 days and 170 days respectively, according to the research house.
“Top Glove is also no longer receiving spot orders given the readily available capacities to be taken up by buyers. As for Kossan, capacities for CY2021 have been fully sold.”
Moving forward, the research house also anticipated a decline in raw material prices are in 2H CY2021.
“Prices for butadiene and acrylonitrile (raw materials for nitrile butadiene latex) are expected to decline as tight supplies continue to ease,” reckoned PublicInvest Research.
“Better yield after the end of the wintering period in May is also expected to result in lower latex concentrate price in 2H CY2021. Lower raw material prices will lead to lower ASPs as glove makers pass on the cost savings to buyers.” – June 21, 2021
