CGS-CIMB Securities: investors should take profit on glove stocks after recent rally

CGS-CIMB Securities: investors should take profit on glove stocks after recent rally

The brokerage firm said it did not see any fundamental reason for the glove stock rally as the sector outlook remained weak amid an oversupply situation and weak demand from buyers.

KUALA LUMPUR: Investors should take the opportunity to take profit on glove stocks at this juncture given the recent rally in their share prices, particularly for Supermax Corp Bhd and Top Glove Corp Bhd, according to CGS-CIMB Securities.

The brokerage firm said it did not see any fundamental reason for the glove stock rally as the sector outlook remained weak amid an oversupply situation and weak demand from buyers.

CGS-CIMB remained 'Underweight' for the rubber gloves sector as channel checks with glovemakers indicated continued weak demand, while there has been no increase in orders despite the emergence of new COVID-19 variants.

"Glovemakers are reporting that utilisation rate remains low at 50-55 per cent," it said in a research note.

CGS-CIMB said costs remained elevated while the average selling price (ASP) hikes have been difficult to implement given the current supply-led industry dynamics.

"We expect ASPs to stabilise at US$20-21 (US$1=RM4.72) per 1,000 pieces (below pre-pandemic levels), with slow recovery anticipated in the mid-term of between three to six months," it added.

While glovemakers worldwide have slowed down their capacity expansion plans substantially, the brokerage firm said industry dynamics remained supply-led, with slow demand and an abundance of supply commissioned during the peak of the COVID-19 pandemic from 2020 to 2021.

"In our view, the oversupply situation would require at least one or two years to abate, before earnings of glovemakers return to their pre-pandemic levels," it added.

As for Supermax and Top Glove, CGS-CIMB said earnings for both companies have not bottomed on a quarter-on-quarter basis but expects quarterly losses in the upcoming third and fourth quarters.

It said Hartalega Holdings Bhd's share price was below its target price of RM2.30, while Kossan Rubber Industries Bhd's target price is at RM1.38.

"Still, we note that there could be further downside risks to our earnings forecasts for both stocks if ASPs, which currently stand at US$21 per 1,000 pieces, do not recover. The current ASP assumptions for the second half of 2022 to the first half of 2023 is US$23-24," it said.

https://www.nst.com.my/business/2022/10/842130/cgs-cimb-securities-investors-should-take-profit-glove-stocks-after-recent