Turnaround for glove sector only in 2025, says CGS-CIMB

Despite increased buying interest in rubber glove stocks following the recent spike in Covid-19 cases and an upsurge in respiratory illnesses in China, Malaysia’s rubber glove producers will still be in the doldrums until 2025.

CGS-CIMB Securities has maintained its “underweight” call on the rubber gloves sector, highlighting that the diminishing pricing power of Malaysian glovemakers due to regional competition may lead to lower long-term margins.

The research house said it expects the glove industry to turn profitable by CY2025F. “The net profit outlook looks unexciting relative to current valuations,” it said in a note.

It has “hold” recommendations on Supermax Corp Bhd and Kossan Rubber Industries Bhd, while maintaining its “reduce” ratings on Hartalega Holdings Bhd and Top Glove Corp Bhd.

CGS-CIMB highlighted three key negative observations in the glove industry that may persist over the next 12-18 months.

“Firstly, the Malaysian glovemakers are still being undercut by US$3-4 (RM14.01-18.69) per 1,000 pieces, given the lower cost structure of regional players in China and Thailand, prolonging the challenges in passing on cost escalations.

“Secondly, profitability, measured by earnings before interest, taxes, depreciation, and amortisation (Ebitda) per 1,000 pieces, may settle at a new normal given the eroding pricing power.

“Lastly, the elevated glove inventories following pandemic-led stockpiling is limiting strong upside to volume growth in the near- term,” it said, adding this could cap the improvement in industry utilisation rates.

It estimates the Big 4 comprising Top Glove, Kossan, Supermax and Hartalega to swing from aggregate losses of RM456 million in CY2023F to a modest profit of RM21 million in CY2024F, growing to a RM568 milllion net profit in CY2025F.

“We also expect some variations to the recovery in utilisation rates, led by Hartalega as it has undergone the largest capacity cut. We believe Top Glove and Supermax may still have plenty of excess capacity to shed, hence their utilisation rates could recover more slowly,” it added.

The rally in shares of glove counters started early last month, with all the big four players – Top Glove, Supermax, Hartalega, and Kossan – ending November at higher prices compared with end-October.

Bursa Malaysia’s Healthcare Index jumped to a six-month high of 1,867.02 on Nov 23 before easing to 1780.63 on Nov 30. The index gained 6.63% or 110.76 points in November against 1,669.87 at end-October.

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