KUALA LUMPUR (Sept 6): Kenanga Research has upgraded the glove sector to "neutral" (from "underweight") and raised its calls for Hartalega Holdings Bhd, Top Glove Corp Bhd and Kossan Rubber Industries Bhd to "market perform" (from "underperform"), while maintaining "market perform" for Supermax Corp Bhd.

In a sector update on Wednesday, the research house said against its expectations, there was upside surprise from one player in terms of a narrower loss, but glove makers’ second quarter of calendar year 2023 (2QCY2023) results were undeniably still languishing in a sea of red.

“While the glove industry might not be out of the woods, we believe the worst is over in terms of earnings downgrades, underpinned by easing cost pressures and savings emanating from decommissioning of older plants moving into 2HCY2023 (second half of calendar year 2023).

“In the meantime, any further decommissioning of older production facilities from local players could take more supply pressures off the sector,” it said.

Kenanga said industry capacity cutbacks should bring back more rational competition and hopefully stop the bleeding of the players.

The research house has target prices of RM1.85 for Hartalega, 75 sen for Top Glove, RM1.28 for Kossan and 80 sen for Supermax.

Kenanga said it expects the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply.

“Nevertheless, we expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants.

“Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness,” it said.