The rubber glove sector has endured a torrid few years after sales plummeted following the initial Covid-19 boom.
PETALING JAYA: It’s never easy to determine if an industry or a stock has hit rock bottom and is on the road to recovery. That is very much the case for Malaysia’s rubber glove sector, which has endured a torrid time in the past few years as sales plummeted after the initial Covid-19 boom, and share prices tanked.
Research houses are still far apart in their assessment on the state of the country’s glove sector. In a recent note, Phillip Capital gave the sector an “overweight” rating and said the supply-demand dynamics for the glove market is expected to further recover in 2024.
In its sector update, the research house said demand is expected to pick-up on re-stocking activities following the past two years of “inventory adjustments”. It said the average selling price (ASP) has stabilised and is likely to trend higher on a more balanced market.
Phillip Capital, which initiated coverage on the sector, described the current recovery as sustainable and driven by a more favourable market dynamic.
It said the decommissioning of inefficient production lines by Hartalega Holdings Bhd, Top Glove Corp Bhd, and Kossan Rubber Industries Bhd have helped reduce global capacity.
“We believe the re-stocking activities will sustain over 2024/2025, with global demand expected to recover to 329 billion/368 billion pieces (+15%/+12% year-on-year), respectively,” it said.
Its sector top picks are Hartalega (Target price (TP): RM3.35) and Kossan (TP: RM2.35). “We like both for its more efficient cost structure and strong balance sheet with high cash level.
However, it has a ‘sell’ rating on Top Glove (TP: 60 sen) on near-term earnings turnaround uncertainty due to a less efficient cost base.
‘Tepid profitability’
In contrast, Kenanga Research has reiterated its “underweight” rating on the rubber glove sector.
“We reiterate our view that the challenging and competitive business landscape currently faced by the sector will persist throughout 2024. While some players have returned to the black, the tepid profitability does not support the lofty valuations,” it said in a note.
It said it was “avoiding” all names under its coverage, namely Hartalega (TP: RM2.33), Kossan (TP: RM1.48), Top Glove (TP: 75 sen) and Supermax Corp Bhd (TP: 84 sen). However, it raised its call on Supermax to “market perform” from “underperform” following the recent weakness in its share price.
Kenanga believes the industry will continue to face massive over-supply, predatory pricing by certain overseas players (i.e. selling below cost over to eliminate competitors), weak demand, and the high cost of inputs such as nitrile butadiene rubber and latex.
It said the industry expects volatile quarterly sales as distributors and buyers see no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available.
Overall, the industry is cautious about raising prices given the still competitive landscape in the industry.
“This falls in line with our view that raising ASP over the immediate term will be challenging. With a low industry utilisation of about 40%, this is without a doubt still a buyers’ market.
On a slightly brighter note, Kenanga said further decommissioning of older production facilities locally should help to ease supply pressure, bringing about more rational competition amongst local players.
Light at end of the tunnel
It’s not all gloom for the glove players. RHB Research pointed out that Malaysia’s gloves export volume spiked 6% month-on-month (m-o-m) (+2% year-on-year (y-o-y)) in February 2024, continuing its growth for two consecutive months.
Export value grew 7% m-o-m (+11% y-o-y), with m-o-m growth surpassing export volume growth – indicating that cost pass-through is picking up gradually.
“We maintain our 2024 global glove demand growth of 7%, premised on the recovery of glove restocking activities in the second half (2H 2024),” it said in a note.
RHB also said that industry-blended ASPs have held up at US$20 (RM95.09) per 1,000 pieces from US$19-20 (RM90.33-RM95.09) previously.
“According to our channel checks, Chinese glove makers’ ASPs are expected to increase to US$16-17 (RM76.07-RM80.82) from US$15-16 (RM71.32-RM76.07).
“The continued narrowing of the ASP gap means the prolonged price war is approaching its tail-end – allowing Malaysian manufacturers to compete via product quality rather than price,” it added.
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