KUALA LUMPUR (July 23): Kenanga Research has maintained its 'underweight' rating for the Malaysian glove sector, and expects the tough operating environment to persist over the immediate term.

In a sector update on Tuesday, the research house said this is due to the still-weak earnings undertone in the first quarter of calendar year 2024, plagued by overcapacity, predatory pricing by certain overseas players, weak demand, and high cost of input.

The house said while some players had returned to the black, the tepid profitability does not support the lofty valuations.

Kenanga added that moving into the second half of the year, it expects input latex prices to ease or taper off, as the wintering months (low production from December to May) come to an end.

However, the house said nitrile butadiene rubber prices are expected to remain stubbornly high (+10% year-to-date).

It said the situation is further aggravated by sustained high operating cost and poor economies of scale from less-than-optimum sales volumes despite some recovery in orders.

“On a slightly brighter note, further decommissioning of older production facilities locally should help to ease supply pressure, at least bringing about more rational competition among local players," Kenanga said.

The house said it is avoiding all names under its coverage, namely Hartalega Holdings Bhd (KL:HARTA) (underperform; target price or TP: RM2.33), Kossan Rubber Industries Bhd (KL:KOSSAN) (underperform; TP: RM1.48), Top Glove Corp Bhd (KL:TOPGLOV) (underperform; TP: 75 sen) and Supermax Corp Bhd (KL:SUPERMX) (underperform; TP: 83 sen).