KUALA LUMPUR (Dec 8): RHB Investment Bank Research (RHB IB) has maintained its “neutral” rating on the rubber glove product sector, and said sentiment on the sector improved recently, following the sequential pickup in sales volumes as announced during the results reporting season in November.
In a note on Friday, the research house said it expects the recovery in demand to remain choppy, and a meaningful difference is likely to be seen only in the second half of next year (2H2024).
RHB IB said that for the latest quarter, Kossan Rubber Industries Bhd chalked a better-than-anticipated performance, while the rest (Supermax Corp Bhd and Hartalega Holdings Bhd) came in below expectations.
Its top picks are Hartalega and Kossan.
“For the quarter, glove makers reported a quarter-on-quarter (q-o-q) improvement in volumes sold (up 5% to 15%), but this was dragged by a weaker average selling price (down 3% to 7% q-o-q).
“Thanks to the sequential improvement in cost dynamics and their plant rationalisation exercises, Hartalega, Kossan and Supermax were able to see better profitability for the quarter,” it said.
Moving forward, the research house expects industry supply to contract by 50.7 billion pieces year-on-year in 2023, in view of the 40 billion-piece cut from Top Glove Corp Bhd, 13 billion-piece cut from Hartalega, three billion-piece cut from Kossan, and five billion-piece cut from Supermax.
It said this should be offset by three billion newly added capacity from Chinese glove maker Intco Medical, and a 7.3 billion planned capacity expansion from Thailand.
“Our 2023 industry annual supply assumption is now 373 billion pieces,” it said.
RHB IB said the sector weighting is due to expectations of normalising costs, production line rationalisation exercises, and views that customer inventory could normalise by 2H2024.
“However, we choose to remain conservative, as we had yet to see consistent demand.
“Moving forward, we expect the improvement in demand visibility, coupled with a favourable cost outlook for 2024, to offer headroom for margin improvement. That said, we expect glove inventory rationalisation to materialise by 2H2024, which would result in better margins.
“The consistency of order replenishment, ability to implement cost pass-through, and gradual improvement in industry utilisation rates should be key rerating catalysts in the near term,” it said.