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Glove stocks undergoing technical rebound

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ResearchMan

ResearchMan
Manager - Equity Analytics
Manager - Equity Analytics

https://www.thestar.com.my/business/business-news/2022/10/18/glove-stocks-undergoing-technical-rebound

PETALING JAYA: The surge in price of glove stocks in the past month is primarily a technical rebound from deeply oversold positions rather than any fundamental change in the industry performance of outlook, said analysts.

The share prices of glove makers like Hartalega Holdings Bhd, Kossan Rubber Industries Bhd, Supermax Corp Bhd and Top Glove Bhd have risen by 20% to 30% from recent lows on higher volumes.

The big four glove makers have in total seen a RM3.97bil increase in market valuation in the past three trading weeks.


The recent rebound in share prices of glove companies might be due to news regarding the Covid-19 XBB Omicron subvariant, as well as the continued weakness of the ringgit versus the US dollar, said a fund manager.

“Fundamentally, there are no changes as low plant utilisation still persists amid intense competition. As such, we think glove companies would not benefit much from the weak ringgit versus the US dollar,” the fund manager told StarBiz.

Rakuten Trade Sdn Bhd vice-president of equity research Thong Pak Leng was also of the same view and said; “I have not seen changes in their fundamentals. This price correction is mostly a technical rebound.”

After hitting a seven-year low of 56.5 sen a share at the end of September, Top Glove shares have risen by some 30% to close at 74 sen yesterday adding some RM1.4bil in market capitalisation in the process helped partly by buying from founder and chairman Tan Sri Lim Wee Chai.

Hartalega added some RM1.37bil in market value as its shares rose 26% or 40 sen to RM1.94 yesterday from nine-year lows last month. Supermax is up by 41% or 26.5 sen to 90.5 sen yesterday from its three-year lows. The stock price rise has added RM700mil to its market capitalisation.

Kossan has risen 19.5 sen or 20% to RM1.18 from eight-year lows hit last month. It market value has risen by RM498mil from the recent share price rise.

While price charts suggest room for further upside for the glove stock in the short term, fundamentals of the sector remain bearish with market demand for gloves remains muted as glove distributors’ inventories remain elevated, and companies push back on their expansion plans, said RHB Research.

The research house noted the erosion of the average selling prices (ASP) for rubber has moderated to about US$24 (RM113) per 1,000 pieces in the recent quarter.

Nevertheless, RHB Research also cautioned against further ASP contractions should the US abolish the import tariffs on gloves imported from China. The spread of Covid virus could seek lockdowns in China which could impact the country’s glove makers.

In the domestic market, rising input costs drove Top Glove to raise its ASP by 5% in order to maintain profitability in the near future.

“The effect of this price hike, in terms of customer acceptance, remains to be seen. This is because the increase was not driven by surging demand. Rather, it was a passive move on the company’s part and is one that may put the group at risk of ceding market share,” the research house stated in a report yesterday.

Glove distributors are reported to hold six to nine months of inventories in hand at present. Should ASP trend lower post purchase, this would present impairment risks to the glove distributors’ inventories and balance sheets.

“We have conservatively estimated for demand to grow by only 4% year-on-year (y-o-y) in 2023 underpinned by price stabilisation towards the first half of 2023.

“This points to a more disciplined approach undertaken by the local glove players in terms of capacity expansion, as well as the gestation period for the drawdown of inventory at the customer level,” said RHB Research.

As of August, industry utilisation rate was below 50% and this has caused glove companies to push back the commissioning of new capacities to the late 2023 or 2024.

On a whole, the global supply of gloves is expected to not grow in 2023 and by 3% y-o-y in 2024, the research house predicted.

Fortunately for glove makers, the price of raw materials like latex and nitrile have eased. These products account for 45% of manufacturing costs.

RHB Research stated natural latex price has fallen by almost 26% from the average the peak of US$1.39 (RM6.56) per kg to US$1.03 (RM6.13) per kg.

This was a 11% drop compared with the five-year pre-pandemic average. Nitrile prices are down 27% year-to-date to US$1.53 (RM7.22) per kg.

“The pace of raw material price normalisation has been far behind the correction in ASPs (about a 75% decline from its peak), as glove makers are currently on the verge of being between break even points and loss-making positions,” said RHB Research.

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