PETALING JAYA: Local glove manufacturers’ operating margins are reverting back to the pre-Covid-19 levels, with their average selling prices (ASPs) trending lower from the US$28-US$30 (RM117-RM126) per-1,000-piece mark, say analysts.
Despite the consensus on glove players’ earnings estimates to remain elevated, RHB Research believes that the market has already priced in the earnings weakness ahead of the consensus.
“While value has emerged for certain names, the balance of risks is still tilted towards the downside, and we do not foresee any immediate catalysts that would lead to a re-rating of the sector,” added the research house.
For the immediate term, the risk of the price war intensifying has toned down, given the capacity restrictions and the energy crunch that is ongoing in China, RHB Research said.
“However, we do not exclude the possibility of the price war risk worsening, once the situation normalises,” it said.
The research house also highlighted that major manufacturers are currently running at a 60% to 70% utilisation rate, with Kossan Rubber Industries Bhd
being the exception at 75% to 80% currently.
Furthermore, demand remains soft as buyers continue to practise making minimal purchases to prevent sitting on high-cost inventory.
“We believe companies that expanded the most throughout the pandemic are at a greater risk of recording poor utilisation rates, going forward.
“Moreover, a prolonged period of sub-optimal utilisation rates should heighten the risk of further delays in capacity expansion,” explained the research house.
Omicron could boost sales volume rather than ASPs, RHB Research said, adding that “we believe the emergence of the new variant does not mean a reset to 2020.”
This is given that a majority of the global population is no longer immune-naïve while policymakers and their respective healthcare systems are better prepared and equipped.
There is also a shorter turnaround time to develop variant-specific vaccines and most countries have accelerated their booster shot policy as well as expanded vaccine access to lower-aged groups.
Major manufacturers have also undergone significant expansion plans and are currently running at below optimal utilisation rates, it said.
The research house has maintained a “neutral” call on the sector, with Kossan being its top pick given its undemanding valuation compared to its peers.
Meanwhile, Kenanga Research said the recent round of reporting season for glove makers suggested that the ASP and margin trends had softened faster-than-expected and would likely continue to remain weak over the next two quarters.
“Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment, signalling an acceleration in overall market ASP normalisation.”
The glove ASPs are also expected to trend lower by 3% to 5% month-on-month.
This is due to buyers waiting for ASPs to stabilise in order to avoid getting caught with higher price inventory, and concerns over new capacity coming on stream,
While the ASP is set to fall further, Kenanga Research said glove manufacturers were of the view that the ASP was unlikely to go below the pre-Covid pricing.
This was considering that the cost structure had risen, among others, including social compliance costs and the still stubbornly high nitrile feedstock cost.
The research house has downgraded the sector to a “neutral” from “overweight” in view of the faster-than-expected normalisation of margins.
“We have cut our earnings for Top Glove Corp Bhd and Supermax Corp Bhd in our recent reports.
“We also make revisions to our ASP and margin assumptions for Kossan and Hartalega Holdings Bhd due to faster-than-expected earnings normalisation,” added the research house.
Its target price for Hartalega is RM7.50, Top Glove RM2.05, Kossan RM1.80 and Supermax RM1.45.