CGS-CIMB Research is advocating that investors take profit on glove stocks following the recent rally which has pushed share prices of the Big Four glove makers up by between 9.3% and 29.3% over the past seven days.
This is because the research house does not see any fundamental reason for the rally as the sector outlook remains weak amid an oversupply situation and weak demand from buyers.
“In our view, there have been no fundamental changes to the sector but only positive news flow that could have driven the re-rating, including (i) a weaker ringgit vs the greenback (glove makers are export-oriented with >90% sales in foreign currency); and (ii) new COVID-19 variants emerging worldwide (XBB, BQ.1 and BQ.1.1).”
Elaborating further, CGS-CIMB Research said its channel checks with glove makers indicate continued weak demand while there has been no increase in orders despite the emergence of new COVID-19 variants.
“Glove makers are reporting that utilisation rate remains low at 50%-55%. Costs remain elevated while ASP (average selling prices) hikes have been difficult to implement given the current supply-led industry dynamics,” justified the research house.
“We expect ASPs to stabilise at US$20-US$21 per 1,000 pieces (below pre-pandemic levels) with slow recovery anticipated in the mid-term (three to six months).”
Even as glove makers worldwide have slowed down their capacity expansion plans substantially, industry dynamics remain supply-led with slow demand and an abundance of supply commissioned during the peak of the COVID-19 pandemic (2020-2021), according to CGS-CIMB Research.
“In our view, the oversupply situation would require at least one to two years to abate before earnings of glove makers return to their pre-pandemic levels,” projected the research house.
On a positive note, CGS-CIMB Research revealed that all listed glove companies are backed by strong net cash positions (RM600 mil to RM2.8 bil) which could support their cash flow requirements in the longer term.
“In addition, glove manufacturers have also slowed down their capacity expansion and capex spending plans, thus helping to preserve their cash positions,” the research house pointed out.
“Supermax Corp Bhd has the highest net cash position among its peers of RM2.8 bil (as of end-2Q CY2022) but it has also earmarked RM1.6 bil of this for its US glove plant (slated for completion in 2H CY2023F).”
Of the Big Four glove makers, CGS-CIMB Research suggested that investors take profit on Supermax (“reduce”; target piece 50 sen) and Top Glove Corp Bhd (“reduce”; TP: 50 sen).
“In our view, earnings for both companies have not bottomed on a qoq (quarter-on-quarter) basis; we expect quarterly losses in the upcoming quarters (3Q CY2022F and 4Q CY2022F),” projected the research house.
“For Hartalega Holdings Bhd, its share price is below our tarte price of RM2.30 (currently on ‘reduce’ call) while we have a ‘hold’ on Kossan Rubber Industries Bhd (TP: RM1.38). Still, we note that there could be further downside risks to our earnings forecasts for both stocks if ASPs (currently at US$21/1,000 pieces) do not recover (current ASP assumptions for 2H 2022-1H 2023: US$23-US$24).” – Oct 19, 2022″
