Kenanga downgrades glove sector to 'underweight', no top picks

Kenanga Research has downgraded the glove sector to “underweight” (from neutral), and said while players had returned to the black, their tepid profitability will not support the current valuations.

In a sector update, the research house said that in addition, earnings quality is lacking as well, with the players' profits driven largely by decommissioning of older plants and lower input costs, while demand and hence plant utilisation remained depressed.

It said this is unlikely to significantly change in calendar year 2024 (CY2024).

“We avoid Top Glove Corp Bhd (underperform or UP; target price or TP: 75 sen) — cut from 'market perform' or MP — Kossan Rubber Industries Bhd (UP; TP: RM1.34), and Supermax Corp Bhd (UP; TP: RM0.85), but maintain our 'neutral' view on Hartelega Holdings Bhd (MP; TP: RM2.33).

“We do not have any top pick for the sector,” it said.

Kenanga said that moving into the first half of CY2024, it expects input latex prices to rise because of low production during the wintering months (between December and May), while nitrile butadiene rubber prices had moved up since the fourth quarter (4QCY2023).

“On a brighter note, natural gas (3QCY2023: -17% quarter-on-quarter), which accounts for 15%-20% of total cost, has eased.

“Overall, all players are mindful that the prospect of raising average selling prices further in subsequent quarters is challenging, due to the current massive overcapacity situation, with only a handful of customers agreeing thus far,” it said.

Kenanga expects the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply.

Based on its estimates, the demand-supply situation will only start to head towards equilibrium in CY2026, when there is virtually no more new capacity coming onstream, while global demand for gloves continues to rise by 15% per annum, underpinned by rising hygiene awareness.

“Margma (the Malaysian Rubber Glove Manufacturers Association) projects 12%-15% growth in global demand for rubber gloves annually from CY2023, following an estimated 25% contraction to 300 billion pieces in CY2023.

“We project demand for gloves to rise by 30% in CY2024 to 390 billion pieces (due to a low base effect in CY2023), and resume its organic growth of 15% thereafter.

“On the supply side, we are now factoring in a reduction of 20 billion pieces of gloves in the system by end-CY2024, as we gathered from channel checks that new or existing smaller players had exited,” it said.

Read more at The Edge Malaysia