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Higher glove ASPs seen in upcoming quarter

KUALA LUMPUR: The resurgence in global Covid-19 cases and supply shortage in the US will continue to support elevated average selling prices (ASPs) for gloves, which bodes well for glove makers like Hartalega Holdings Bhd.

While demand for gloves is expected to stay strong, there have been notable concerns about the pace of growth in ASPs amidst the rollout of vaccines globally and with more capacity coming onstream.

While steep ASP hikes are expected to be on hold for now as players realign their supply away from the US – which offers a premium in the 5%-10% range – Hartalega noted that the demand-supply equilibrium remains favourable for manufacturers.

Management expects the upcoming quarter to realise higher ASPs on a quarter-on-quarter (q-o-q) basis.

“Management believes ASPs have found a bottom over the near term as the overall demand-supply imbalance remains extremely favourable, highlighting that equilibrium is likely to be achieved only in two years.

“Besides, instances of a country-specific Covid-19 spike did lead to increased enquiries, such as from India, ” highlighted UOB Kay Hian Research (UOBKH) in a report.

The stronger ASP helped buoy Hartalega’s fourth-quarter revenue despite lower sales volume.

The glove maker’s revenue for the fourth quarter of financial year 2021 (FY21) grew by 196% year-on-year (y-o-y) to RM2.3bil due to ASP increase of 273% y-o-y.

However, sales volume was down by 23% y-o-y due to the temporary closure of production lines to curb the spread of Covid-19 in its plants as well as a lack of shipment availability, given the global container shortage.

Consequently, the utilisation rate was much lower during the quarter ended March 31,2021 at 64%, as compared to 96% in the fourth quarter of FY20.

But as a result of the rising ASPs, Public Investment Bank noted that net margins improved by 33.8 percentage points y-o-y to 48.7%. Net profit also grew by more than eight-fold y-o-y to RM1.12bil.

The group is confident that the container shortage will be resolved in the next quarter, which should boost its sales volume in the near term.

However, Kenanga Research pointed out that the recently announced results of industry peers suggest that the nitrile ASP uptrend could be waning and is expected to soften albeit at a slower pace on the back of still robust demand.

“But it is unlikely to fall off a cliff, ” the research house said. Kenanga still expects ASP to be higher in the first quarter of FY22.

According to the Malaysian Rubber Glove Manufacturers Association, the global shortage of rubber gloves will last beyond first-quarter 2022, with growth rate averaging between 15% and 20% per annum going forward.

Lead times are still expected to be high, averaging at six to eight months, which is lower compared to 12-14 months previously.

Kenanga opined that the lead times suggest that 2022 demand will remain strong.

“To date, six out of 10 lines in Hartalega’s Plant 7 have been commissioned. Upon full commissioning, Plant 7 will have an annual installed capacity of 2.7 billion pieces.

“In addition, construction for the upcoming expansion, NGC 1.5, is currently underway and expected to commission the first line by December 2021.

“NGC 1.5 expansion plans include four additional production plants, which will contribute 19 billion pieces to the annual installed capacity. This is expected to increase to 63 billion pieces over the next two to three years, ” it said.

Analysts have mainly remained positive on Hartalega’s prospects, although most have reduced their target price on the counter to factor in the impact of a decline in pricing.

Public Investment and Kenanga have “outperform” calls on the stock with target prices of RM15.90 and RM16, respectively.

UOBKH, meanwhile, called a “hold” on the company with a target price of RM9.30.

“We think sentiment should gradually diminish as Hartalega approaches its peak quarterly earnings but is still supported by its windfall earnings. Hartalega deserves to trade at a premium relative to its peers, ” the brokerage said.


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