KUALA LUMPUR (March 4): Affin Hwang Investment Bank has maintained its "underweight" call on the rubber products sector as it expects the sector's margins to deteriorate further on lower average selling prices (ASPs).

In a note on Friday (March 4), its analyst Ng Chi Hoong said the sector’s margins had room to deteriorate further as profitability in the latest results (for the fourth quarter ended Dec 31, 2021 or 4Q21) of the glove manufacturers was still at least two times higher than pre-Covid-19 levels.

According to him, during the recent earnings reporting season, most glove manufacturers continued to guide for lower ASPs in 2022, citing slower demand and an increase in new supply by both new and existing manufacturers.

He said that the average ASP in 4Q21, which stood at US$25 (about RM104.62) to US$30 per 1,000 pieces, was still higher than US$20 to US$22 pre-Covid-19.

Although ASPs have fallen by more than 70% since the peak in 2Q21, he said the sector's earnings before interest, taxes, depreciation and amortisation (EBITDA) margin was still at 28.7% in 4Q21, significantly above the average EBITDA margin of 17.2% in 2019, indicating that there is still room for ASPs to decline further.

However, he does not expect margins to fall below pre-Covid-19 levels as existing manufacturers have started to cut back on their expansion already.

“We still expect margins per glove to stabilise by the end of 2022 as the lower ASPs would deter new manufacturers from expanding their capacity, which would reduce the risk of a price war,” he said.

As ASPs continue to decline, he opined that some new manufacturers and small-scale manufacturers might continue to operate at a loss due to a lack of scale, which could discourage them from expanding further.

Prior to the spike in ASPs at the end of 2019, he noted, some of the smaller glove manufacturers were already operating at a loss.

He is still of the view that post the stabilisation of margins, the market will continue to be dominated by a few larger players as the economies of scale would provide them a better cost advantage against the smaller players.

However, he said there are still pockets of opportunities for the smaller manufacturers, like household, retail and transportation, etc, for which pricing is not the main competitive factor.

Given the lack of a near-term rerating catalyst and uncertainty over the timing of ASPs bottoming, he recently downgraded the sector to "underweight" from "neutral".

Apart from declining ASPs, he said Malaysian glove manufacturers are also faced with other issues like a shortage of foreign labour and shortage of shipping containers, which had affected them from delivering products to customers on time.

“If the labour shortage issue continues, the glove manufacturers are most likely only able to operate at 70% to 80% utilisation rates. The shipping container constraint also reduced overall sales volume in 4Q21 by 5% to 10% in our estimates,” he said.

He maintained his "sell" calls on Hartalega Holdings Bhd (target price [TP]: RM4.60), Kossan Rubber Industries Bhd (TP: RM1.20), Supermax Corp Bhd (TP: 95 sen) and Top Glove Corp Bhd (RM1.85).

At the time of writing on Friday, Hartalega had fallen 13 sen or 2.74% to RM4.62, valuing the group at RM4.11 billion. Over the past one year, the counter has fallen 52.12%.

Meanwhile, Kossan slipped two sen or 1.12% to RM1.77, giving the company a market capitalisation of RM4.66 billion. The counter has tumbled 52.16% over the past one year.

Supermax, on the other hand, lost three sen or 2.86% to RM1.02, valuing the firm at RM2.86 billion. Over the past one year, the counter has declined 76.61%.

Top Glove also dropped by four sen or 1.98% to RM1.98, giving the company a market capitalisation of RM16.74 billion. The counter has shed 60.08% over the past one year.