Rubber Glove Sector - Tough Times Remain
- Glove stocks under our coverage (Supermax, Kossan Rubber Industries, Hartalega and Top Glove (SGX:BVA)) have rallied by 9.3%- 29.3% over the past seven days. See Top Glove's Share Price. In our view, there have been no fundamental changes to the sector, but positive newsflow that could have driven the re-rating include:
- a weaker ringgit vs US$ (glove makers are export-orientated with > 90% sales in foreign currency), and
- new COVID-19 variants emerging worldwide (XBB, BQ.1 and BQ.1.1).
- However, channel checks with glovemakers indicate continued weak demand, while there has been no increase in orders despite the emergence of new COVID-19 variants. Glovemakers are reporting that utilisation rate remains low at 50-55%.
- Costs remain elevated, while ASP hikes have been difficult to implement given the current supply-led industry dynamics. We expect ASPs to stabilise at US$20-21 per 1k pieces (below pre-pandemic levels), with slow recovery anticipated in the mid-term (3-6 months).
- While glovemakers worldwide have slowed down their capacity expansion plans substantially, industry dynamics remain supply-led, with slow demand and an abundance of supply commissioned during the peak of the COVID-19 pandemic (2020- 2021). In our view, the oversupply situation would require at least 1-2 years to abate, before earnings of glovemakers return to their pre-pandemic levels.
- On a positive note, all glove companies are backed by strong net cash positions (RM0.6bn-2.8bn) which could support cash flow requirements in the longer term. In addition, glove companies have also slowed down their capacity expansion and capex spending plans, thus helping to preserve their cash positions.
- In our view, investors should take the opportunity to take profit on glove stocks at this juncture, particularly for Supermax (Rating: REDUCE, Target price: RM0.50) and Top Glove (Rating: REDUCE, Target price: RM0.50). In our view, earnings for both companies have not bottomed on a q-o-q basis; we expect quarterly losses in the upcoming quarters (3QCY22F and 4QCY22F).
- For Hartalega, its share price is below our target price of RM2.30 (currently REDUCE call), while we have a HOLD on Kossan (Target price: RM1.38). Still, we note that there could be further downside risks to our earnings forecasts for both stocks if ASPs do not recover.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2022-10-19 2022-10-19
Read also CGS-CIMB's most recent report:
2022-09-20 Top Glove - Tough Times Remain Ahead
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