AMID its assessment that the bottom is nearing for the glove sector, UOB-Kay Hian Research has upgraded the sector to “market weight” from “underweight” previously while advocating for investors to accumulate on potential upcoming weakness.
According to the research house, the recent results which culminated in valuation declines across the sector comes as no surprise given the inertia to adjust earnings projections by consensus amid drastic sector developments.
“That said, we believe earnings downside is limited given that we have projected for softer than pre-pandemic margins for 2022,’ opined analyst Philip Wong in a glove sector update.
“This is balanced by a potential bottoming of sentiment in tandem with earnings over the next one to two quarters. Given the temporal nature of bottoming of the sector, the reward-to-risk pay-off now appears balanced with valuations trading below -2SD (standard deviation).”
More broadly, UOB-Kay Hian Research observed that current average selling prices (ASPs) are close to US$25/1,000 glove pieces or a 3.8% month-on-month (mom) decline. The research house expects ASPs to remain above pre-pandemic levels given that input costs such as natural gas, labour and logistics are considerably higher.
“However in terms of margins, we expect it to potentially find a bottom in 2Q or 3Q 2022 with margins possibly dipping below pre-pandemic levels,” projected the research house.
“Buyers appear to be replenishing inventory now that ASPs are closer to pre-pandemic range. A pick-up of utilisation rates towards 80-90% followed by resumption of capacity expansion should signal the bottom for the industry. Sentiment is unlikely to improve until a bottom is found.”
Over the past few months, capacity expansion of the Big-Four glove companies for 2022 has been reduced from 15.6% to 6.5%, of which capacity is likely only to be introduced in 2H 2022 onwards.
The projected global demand for rubber gloves of 15-20% for 2022 by the Malaysian Rubber Glove Manufacturers Association’s (MARGMA) has been downward adjusted to 10%-15% which is still higher than pre-COVID-19 levels (2019).
“This implies demand normalising by a double-digit percentage for 2022. Given this backdrop and sluggish utilisation rates of 60-70%, we do not rule out further deferment of capacity addition,” reckoned UOB-Kay Hian Research.
“Across the seven public listed companies that entered into the foray over the past year, these companies made an average loss of RM6 mil with a -7.4% profit margin in 4Q 2021. Given these dynamics, we do not expect these new entrants to have a lasting and significant impact on the existing glove producers.” – March 18, 2022
