What’s up with glove stocks? Should you join the ride?

 What’s up with glove stocks? Should you join the ride?


With the resurgence in glove counters listed on Bursa Malaysia on May 9, the first thing that comes to mind is whether there is another outbreak to warrant such interest.


Fortunately, there is no outbreak that we are aware of.


And with the slew of negativity surrounding glove stocks, why are glove stocks moving upwards on active trade especially on May 9?


Is the worse over for these players or were analysts painting a bleak picture to keep the share prices low so that investors could accumulate?


Top Glove Corp Bhd was the second most actively traded stock on Bursa on May 9, gaining 15.3% to breach RM1 to close at RM1.09.


Also on the most actively traded list is nitrile glove maker Hartalega Holdings Bhd, which rose 20% to RM2.26.


The other glove manufacturer is Careplus Group Bhd, which climbed 18.9% to 31.5 sen while Kossan Rubber Industries Bhd increased 12.3% to RM1.37.


The uptick in some glove counters is surprising given the slew of bad news of late.


For instance, Hartalega is going through some difficult situation as it decommissioned its Bestari Jaya production facility, incurring an impairment loss of RM347 mil for FY ending March 31, 2023.


Essentially, Hartalega is cutting 40 production lines from its capacity by year end.


Apart from the impairment cost, the company will also make provisions for retrenchment costs and contract obligation expenses of about RM70 mil in FY2024.


As for Top Glove, the market is not expecting much improvements anytime soon.


In fact, Hong Leong Investment Bank (HLIB) Retail Research expects further correction for Top Glove based on the worsening indicators.


At that time, the research house said on Apr 27 that a decisive break down below the RM1 physiological level will dampen the share price toward 91 sen - 87 sen - 76 sen and advised investors to cut loss at RM1.19.


HLIB opined that while raising average selling prices may relieve some margin pressure, it does not expect this to bring Top Glove back to profitability soon due to two factors.

Firstly, Top Glove's plant utilisation rate is expected to remain subdued on lack of sizeable orders given the short lead time and the availability of idle capacities among other glove manufacturers.


Secondly, pricing adjustments are still not sufficient to fully cover the cost increases driven primarily by higher natural gas prices (+15%) and electricity tariffs (+5.4 times).


Top Glove is likely to remain loss-making in the upcoming two quarters, leading to decreasing cash pile and might trigger a de-rating in share price due to a higher risk premium.


Similarly, JPMorgan Asia Pacific Equity Research foresees the glove sector to remain in the red as overcapacity-led average selling price (ASP) weakness will continue until at least end-2024.


However, the research house highlighted that Kossan Rubber Industries Bhd is best positioned to weather the storm.


It said Kossan’s net cash stands at RM2 bil, making up about 57% of its market capitalisation.


JPMorgan said P/B remains palatable at 0.9 times, compared with Top Glove (1.6 times) and Hartalega (1.4 times).


Given the bleak outlook on the glove industry, it is amazing to witness the concurrent jump in glove counters.


It is certainly a huge risk to take in glove stocks given the weak fundamentals but these counters offer profit taking opportunities as well.


#KOSSAN#TOPGLOV#HARTA#CAREPLS

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