Malaysian rubber glove makers are facing tough and challenging times as witnessed by the recent “underweight” rating on the glove sector by Hong Leong Investment Bank (HLIB) Research, which also says that the aggressive expansions made by glove makers during the pandemic has tipped the rubber glove sector into an oversupply situation.
The research house says there is a demand-supply imbalance caused by aggressive expansion during the pandemic, which is expected to continue in the second half of 2022.
It said average selling prices (ASPs) are also expected to stay depressed, and any upward revision in pricing would be marginal, mainly to accommodate the higher operating costs.
The research house noted that some new entrants are looking to exit the industry given the challenging environment, but it would take the collective effort of industry players to curtail excess supply.
HLIB added that the high inflationary environment has impacted glove players in the form of cost pressures from higher raw materials, wages and natural gas costs.
It said raw material prices are not expected to ease in the second half of 2022 as latex production climbs post-wintering season coupled with lower demand for nitrile butadiene rubber.
HLIB has downgraded its rating on Hartalega Holdings Bhd and slashed its FY23-24 earnings projections by 30% to reflect the anticipated margin erosion. “Not to mention Hartalega also has the highest exposure to nitrile gloves (c.96% of FY22 sales volume are made up of nitrile gloves), a segment that is facing the fiercest competition at present,” it said.
“All in, our recommendation is also subsequently downgraded to ‘sell’,” it said.
The research house also cut its earnings estimates on Kossan Rubber Industries Bhd by 18-27% to factor in the expected margin squeeze, and lowered its target price to RM1.44. However, it maintained “neutral” on the stock given its smaller annual output capacity is likely to fill up sooner with any possible increase in orders.
HLIB revised higher its earnings forecast for the world’s largest glove maker Top Glove Corp Bhd by less than 3% for FY22-24 on adjustment to its RM-US$ exchange rate assumption. It maintained “sell” on the stock with a slightly higher target price of 0.83 sen.
“All in, we maintain ‘underweight’ on the glove sector,” it said.