WHILE earnings for Malaysia’s Big-Four glove makers are expected to shrink further amid an imbalanced demand-supply dynamics, the downside is increasingly limited with some producers already falling into losses.
While the slide appears to have steadied, this represents an additional quarter of soft fundamentals with current average selling prices (ASPs) being close to the US$23.00 per 1,000 glove pieces level, according to UOB Kay Hian Research.
“This is amid rising cost, primarily with the minimum wage (+25% in May) taking full effect in 3Q 2022,” observed analyst Philip Wong in a sector update. “This is partially offset by nitrile and latex costs declining marginally vis-à-vis 2Q 2022 by 3%-4% qoq (quarter-on-quarter).”
Reiterating its “market weight” outlook on the sector, UOB Kay Hian Research said small-cap glove producers have fallen into operational losses with no meaningful capacity addition expected over the immediate term as utilisation rates remain at sub-optimal levels.
In this regard, China producers could be one quarter away from the same predicament with them registering EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin of 3.4% on average in the recent quarter.
“These indicate that the industry is nearing the bottom given the unsustainability of such operating conditions,” stressed UOB Kay Hian Research. “Due to the temporary nature of bottoming of the sector and long-term structural growth that the industry offers, investor interest may be swiftly piqued to bottom fish.”
On the hindsight, the research house said current valuations are trading close to -1 SD (standard deviation) of the sector’s five-year pre-pandemic price-to-earnings (PE) mean whereby the reward-to-risk pay-off appears balanced.
“That said, we advocate investors to accumulate on potential significant weakness given that earnings could undershoot expectations,” suggested UOB Kay Hian Research.
Elsewhere, the research house is wary that Top Glove Corp Bhd whose market capitalisation of RM8 bil which ranks it 39th on the FBM KLCI Index is at risk of being exempted from the benchmark index during the November review (should its ranking remains below the 35th spot).
“Hartalega Holdings Bhd with a market capitalisation ranking of 34th position, QL Resources Bhd and AMMB Holdings Bhd are in queue to be index replacements,” opined UOB Kay Hian Research.
“Apart from that, should Top Glove’s 15-month timeline to resolve its US CBP (Customs and Border Protection) ban be an indicator, Supermax Corp Bhd could potentially resolve theirs sometime by end-2022.”
Source: Focus Malaysia
