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MIDF downgrades glove sector to 'neutral' as peak in urgent demand points to end of supercycle

KUALA LUMPUR (June 24): MIDF Research has downgraded glove sector to "neutral" from "positive", as the upcycle of the sector is coming to a tail end.

Its analyst Ng Bei Shan said in a note today the diminishing spot rates and lower average selling prices (ASPs) show that urgent demand has peaked.

According to her, compared with the end of 2020, spot ratios for rubber gloves have eased, which means that the urgent orders for rubber gloves may be subsiding.

Based on channel checks, she said, glove makers have lower spot allocation compared with one to two quarters ago.

"Although we expect prices to stay above pre-pandemic level, we opine that as the urgency for gloves subsides, ASPs for gloves are likely to tilt lower," she said.

She also noted that the improving situation of the pandemic in the developed countries has shifted the urgent demand for rubber gloves.

The high vaccination rate in the UK, the US and EU would also imply that the urgency for rubber gloves in these countries may slow down and put further pressure on ASPs going forward, she added.

Meanwhile, the higher capacity has also contributed to the easing in demand for urgent orders.

According to her, this year, companies continued to add in new production lines to churn out more gloves and the estimated new supply, contributed by existing players and new set-ups, expected to increase by more than 30% compared with in the previous year.

She also expects glove makers' profit margins to narrow with lower ASPs and firmer cost structure.

Adding to the narrower profit margins will be other costs of doing business, which include higher labour costs and the compliance of better environment, social and governance practices, she said.

She believes that glove makers' profitability is likely to normalise in tandem with the lower ASPs.

On average, she has reduced the sector's 2022 to 2023 ASP assumption by 5% to 10%.

Following the changes in assumptions and earnings estimates, Ng has downgraded Hartalega Holdings Bhd, Kossan Rubber Industries Bhd, Supermax Corp Bhd and Top Glove Corp Bhd to "neutral" from "buy" due to limited upside in capital gain.

She has also revised down Hartalega's target price (TP) to RM8.40 from RM12.96, Kossan's TP to RM3.31 from RM5.83, Supermax's to RM3.46 from RM6.73, and Top Glove's to RM4.55 from RM5.73.

"Among the stocks, we prefer Hartalega for its above-industry profitability and its focus on product differentiation and innovation," she said.

Hartalega, Top Glove and Supermax were among the top 30 losers this morning.

At 11.35am, Hartalega fell 20 sen or 2.5% to RM7.80, Top Glove slipped 11 sen or 2.47% to RM4.34, Supermax slid nine sen or 2.62% to RM3.35.

Kossan, meanwhile, shed eight sen or 2.37% to RM3.29.


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