As expected, the glove sector’s recovery plot continues to thicken after delivering resilient earnings growth in 3Q23. While more optimism is emerging following better operating matrixes and consensus’ rounds of catch-up upgrades, we deem these to be fairly reflected in the recent aggressive share price movement.
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Imminent operational and earnings recoveries throughout 2024.
After more than two years of industry consolidation since pandemic highs, various tailwinds are flowing through the Malaysian glove sectors. These include:
improving profitability outlook,
depleting excess inventory which points to demand recovery,
margin expansion on better efficiency and scaled-back capacity, and
moderating input costs.
As such, we reiterate our view that the sector’s losses have bottomed in end-1H23, and is on the cusp of progressive recovery. We expect sequentially stronger earnings for the sector in 4Q23-2024, led mainly by demand recovery, improving margins amid cost efficiency and better capacity utilisation.
Rationalisation of overhyped market expectations.
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Realistically, industry players are hoping to see potential meaningful earnings recovery closer to 2H24, with operational profitability (ex-interest income or other non-core earnings stream) only recovering back to pre-pandemic level by 2025.
We opine that market may be too optimistic and has built up expectations that operating matrixes such as utilisation rate and profitability margin will return to 2019’s levels within the upcoming 2-3 quarters.
Utilisation rates of domestic glove producers stood at merely 35-45% as of end-3Q23, signifying supply-demand has yet to be balanced and near-term steep ASP hikes are very unlikely.
Recent aggressive share price uptick reflects mean valuations on 2025 full earnings recovery.
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Above is an excerpt from a report by UOB Kay Hian Research. Clients of UOB Kay Hian may be the first to access the full PDF report @ https://www.utrade.com.sg/.
