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CGS-CIMB sees pandemic-driven tailwind subsiding for rubber gloves, downgrades sector to 'neutral' on weaker earnings prospects

KUALA LUMPUR (July 1): CGS-CIMB Research downgraded the rubber glove sector to "neutral" from "overweight" due to weaker earnings prospects.

In a June 30 note, the research house said the weaker earnings prospects are forecasted to occur through declining average selling prices (ASPs) and aggressive capacity build-up.

CGS-CIMB noted that the “aggressive capacity build-up in the sector is a concern”.

In view of the surge in global glove demand born out of the pandemic, glove makers under its coverage are aggressively growing their production capacity, estimating that this collective capacity will rise by 60.5% by end 2023 from 201.2 billion currently.

“This is notwithstanding new supply from other existing glove makers and new entrants with more companies venturing into glove production. While an oversupply situation should not occur in the near term, the rise in global glove supply should lead to more balanced supply-demand dynamics in the sector,” the research house noted.

CGS-CIMB believes that ASPs for rubber gloves have peaked in the first quarter of 2021 (1Q21), and should decline going forward.

This is due to aggressive expansion plans from both new and existing glove makers, as well as slower buying patterns from customers and diminishing spot orders

The research house expects ASPs (per 1,000 pieces) in 2021, 2022 and 2023 to reach US$77, US$39 and US$29 respectively. CGS-CIMB added that it is “of the view that ASPs will decline to pre-Covid 19 levels” (US$21-24 per 1,000 pieces) given the higher production costs and higher consumption patterns.

CGS-CIMB conducted proprietary case studies on the dynamics of global glove supply and demand and its findings indicate that “glove supply surplus is unlikely to happen for the next 2-3 years”. However, it noted that the pace of incoming supply of gloves may be ahead of global demand growth from CY24F onwards in the event that sector capacity growth continues at above 20% per annum, global glove demand grows below 10% per annum and top seven listed glove makers’ market share of the global glove supply is at 60% or below annually.

“While we turn neutral on the sector’s prospects, current valuations have accounted for the weaker earnings prospects, in our view.

This is supported by: i) solid dividend yields (3.3- 13.2% for CY21-23F), ii) strong balance sheets (all at net cash positions) and iii) Malaysia’s dominant position in global glove exports (67% market share - 2020). We also believe that ESG metrics of glove makers, mainly in regards to social compliance,” the research house pointed out.

Its top sector pick is Kossan Rubber Industries Bhd, while it has maintained its “Add” call on Hartalega Holdings Bhd. This, CGS-CIMB said, is due to their attractive valuations (steep discount to 5-year [2015-2019] and 10-year mean), the lesser extent of volatility in earnings (lower ASP hikes during Covid-19) and less exposure to spot orders.

It has downgraded Supermax Corp Bhd to Hold, from Add, as its expects ASPs in its FY22 to FY24 to fall by a larger quantum vis-a-vis its meets as its original brand manufacturing (OBM) model will not provide better margins in a normalised environment.

Upside risks for the sector include a sharp rise in glove demand and or ASPs, while downside risks are sharper-than-expected fall in glove ASPs.


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