Declining profits ahead for glove makers
KUALA LUMPUR: Maybank Investment Bank Research has downgraded the glove sector to neutral on concerns of declining average selling price (ASP) trend and lack of strong catalysts over the medium term.
“We are changing our valuation method from discounted cashflow (DCF) to price-to-earnings ratio (PER) multiple. We downgrade Kossan to hold while maintaining our buy on Hartalega and Hold on Top Glove, ” it said on Friday, adding its preferred exposure to the sector is Hartalega.
Maybank Research said the glove sector is entering a phase of declining ASP (and hence profit) trend on increased supply and rising vaccination rates. Competition is intensifying among both existing and new entrants.
Despite the record profit in 1HFY21, share prices of glove players declined by -18% to -30% year-to-date in anticipation of the normalisation of ASP (and hence, lower profit) on softening demand urgency due to expanding supply and higher vaccination rates, especially in the US and European countries which are the key markets for Malaysian gloves companies.
“Elsewhere, ESG risks (relating to the treatment of foreign workers) are heightened for Malaysian glove players in their export markets, particularly in the US, ” it said.
In early May 2021, the US Customs and Border Protection (CBP) has seized latex gloves worth RM2.85mil (4.7 million gloves) produced by Top Glove in the Port of Kansas City in Missouri due to information that the gloves were allegedly made by forced labour.
Maybank Research said the best is over for the glove makers.
It pointed out ASP has peaked in 1H21 and earnings upcycle seems to have been cut short with faster-than-expected decline in ASP in 2H21, and shorter lead time due to moderated demand for gloves on rising vaccination rates.
The US CBP’s withhold release order (WRO) on Top Glove has also accelerated the decline in ASP as Top Glove is diverting orders away to other regions with lower ASPs.
In recent conference calls with analysts, both Hartalega and Top Glove have guided for lower ASPs in the coming months. Intensifying competition among the existing and new players (especially the rapidly-expanding China glove producers) could further pressure ASP.
According to a Frost & Sulivan report, ASPs for nitrile/latex gloves are expected to decline by -59%/-52% to US$35/US$20.4 per 1, 000 gloves by 2023, from current US$85/US$42.7 per 1, 000 gloves, respectively.