Saturday 13 Apr 2024
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KUALA LUMPUR (Nov 27): PublicInvest Research has upgraded its sector rating for rubber gloves from "underweight" to "neutral", as it believes the worst is over with the glove makers returning to the black. 

The research firm also raised its calls on recently turned-around Hartalega Holdings Bhd and Kossan Rubber Industries Bhd from "underperform" to "neutral", with new target prices (TPs) of RM2.11 for Hartalega and RM1.38 for Kossan, on anticipation of higher sales volumes and stabilised average selling prices (ASPs).

PublicInvest also noted that Kossan remains the "most resilient", with a 46.56% net cash-to-market cap. 

It maintained still loss-making Top Glove Corp Bhd's "underperform" rating, with a TP of 63 sen, given the company's low net cash position and utilisation rate.

“Although we believe the worst is over, with the glove makers turning profitable moving into the first half of 2024 (1H2024), we do not expect earnings to revert to pre-Covid levels anytime soon,” it added.

The research firm warned that ASPs are not expected to rise meaningfully, given the prevailing pricing competition from Chinese glove players. 

“We believe the recent positive movements in share prices were reflective of anticipated earnings improvement. Nonetheless, we remain cautious about the Chinese players, which are currently running at near capacity, and should they continue to expand, Malaysian glove players’ market share would be eroded,” it added.

Notably, PublicInvest said the glove manufacturers had shown a quarter-on-quarter improvement in their recent results, signalling a positive trend in their performance, primarily attributed to elevated sales volumes and decreased costs of raw materials. 

It noted that raw material prices, specifically nitrile butadiene and natural latex (accounting for about 30% of total production cost), trended downwards from April to July 2023, leading to better operating margins. 

“However, nitrile butadiene prices are expected to rise in 1H2024, due to an increase in feedstock prices, while latex prices are expected to stay flat. We also note that natural gas prices (which account for about 20% of total cost) have been trending upwards from US$2.60 (RM12.17)/MMBtu in August 2023 to US$3.10/MMBtu in October, which will translate into higher gas tariffs in 1H2024,” it said, adding that the hike in cost can be offset by capacity rationalisation as well as higher sales volumes.

Additionally, the house said weakening of the ringgit is expected to benefit the rubber glove sector, as sales are mostly denominated in US dollar. 

“Strengthening of the US dollar would translate into higher revenue in ringgit. However, as some of the raw material costs are also quoted in US dollars, this would partially offset the positive impact arising from a stronger US dollar,” it added.

PublicInvest also noted that the Chinese players are running at near full capacity, and notably, Intco Medical had increased production capacity by about 7% from 75 billion pieces per annum to 79 billion a year by the second quarter ended June 30, 2023. 

Based on channel checks, the Chinese players are currently selling at US$16 to US$18 per 1,000 pieces. 

“The blended ASPs have stabilised at about US$20 to US$21 per 1,000 pieces for Malaysian glove players. Nevertheless, we observed that the pricing gap between Malaysian and Chinese players has narrowed from US$4 per 1,000 pieces to US$2 to US$3 per 1,000 pieces. 

“This was partly attributed to rising coal prices on stronger China’s power demand, which limited the Chinese players’ ability to further decrease ASPs,” it added.

Kossan settled one sen or 0.58% lower at RM1.72 a share at Monday's noon break, valuing the group at RM4.40 billion.

Hartalega closed two sen or 0.79% higher at RM2.54, with a market capitalisation of RM8.71 billion.

Top Glove ended 1.5 sen or 1.67% lower at 88.5 sen, translating into a market cap of RM7.26 billion.

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