KUALA LUMPUR (June 22): Malaysian rubber glove makers are showing clear earnings improvement, but BIMB Securities Research argues that higher valuations remain unsupported despite the sector's strongest footing since the post-pandemic slump.

The house in a note on Monday maintained its 'neutral' call on the sector, with ‘hold’ recommendations on all stocks under coverage including Top Glove Corp Bhd (KL:TOPGLOV) with a target price (TP) of 75 sen, Hartalega Holdings Bhd (KL:HARTA) with a TP of RM1.10, Kossan Rubber Industries Bhd (KL:KOSSAN) with a TP of RM1.19, and Supermax Corp Bhd (KL:SUPERMX) with a TP of 29 sen.

“While the earnings recovery is becoming increasingly visible, investors should avoid extrapolating this into another supercycle. 

"The industry is recovering from an exceptionally depressed base, not entering another Covid-era shortage. 

"Excess capacity remains elevated, and Chinese competition outside the US continues to cap pricing power, hence the sector is not yet ready for a broad rerating," said the research house.

BIMB noted that the industry is seeing improved utilisation of around 80%-90%, ongoing efficiency initiatives and more stable average selling prices (ASPs), all of which could collectively support stronger earnings delivery.

Further, local producers’ ESG compliance is becoming another competitive advantage when combined with to the widening US tariff gap between Malaysia and China.

“With the US consuming roughly 100 billion-120 billion gloves annually, even modest market share shifts could translate into billions of additional pieces for Malaysian exporters,” the house noted.

Thus, local players are well positioned to benefit given their established customer relationships and compliance track records.

However, oversupply and Chinese competition outside the US continue to cap pricing power, thus preventing broad valuation rerating.

Excess global capacity has resulted from pandemic-era expansions. Even so, Chinese manufacturers remain aggressive and use price to defend utilisation.

This capacity discipline problem is expected to be absorbed only through multiple years or demand growth or meaningful supply rationalisation.

In the meantime, “the ASP upside will remain capped and valuation multiples are unlikely to revisit pandemic-era highs”, BIMB added.