Rubber glove oversupply situation likely to continue

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KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research is downgrading its forecasts on rubber glove makers because the sector is confronted with an oversupply situation coupled with inflationary pressures.

According to the analysis home, there’s a demand-supply imbalance brought on by aggressive enlargement throughout the pandemic, which is anticipated to continue in 2H22.

“In view of the extraordinary competitors, particularly within the nitrile house, we additionally anticipate to see additional margin contractions in 2H22 as we imagine the glove makers are unable to absolutely cross on the hike in prices to patrons,” it mentioned.

The analysis home famous that some new entrants are wanting to exit the business given the difficult surroundings, however it could take the collective effort of business gamers to curtail extra provide.

“From what we collect, many of the glove makers are retaining their enlargement plans on maintain for now,” it mentioned.

HLIB added that the excessive inflationary surroundings has impacted glove gamers within the type of value pressures from larger uncooked supplies, wages and pure fuel prices.

It mentioned uncooked materials costs usually are not anticipated to ease in 2H22 as latex manufacturing climbs post-wintering season coupled with decrease demand for nitrile butadiene rubber.

In addition, HLIB expects ringgit appreciation in opposition to the US greenback in 2H22, which might be detrimental to glove makers.

“Owing to the mushy demand and intense competitors, glove makers now have lesser pricing energy and have but to return to the cost-plus foundation mannequin.

“Margin erosions are likely to continue in 2H22 in our view, as the fee hikes had been unable to be absolutely handed on,” it mentioned.

HLIB, which has an “underweight” advice on the sector, slashed its FY23-24 earnings projections on Hartalega Holdings Bhd by 30% to replicate the anticipated margin erosion.

“Not to point out Hartalega additionally has the best publicity to nitrile gloves (c.96% of FY22 gross sales quantity are made up of nitrile gloves), a phase that’s going through the fiercest competitors at current.

“All in, we decrease our TP for Hartalega to RM2.37 (from RM4.21) and our advice can also be subsequently downgraded to ‘promote’,” it mentioned.

The analysis home additionally minimize its earnings estimates on Kossan Rubber Industries Bhd by 18-27% to issue within the anticipated margin squeeze, and lowered its goal value to RM1.44.

However, it maintained “impartial” on the inventory given its smaller annual output capability is likely to refill sooner with any attainable improve in orders.

HLIB revised larger its earnings forecast for Top Glove Corp Bhd by lower than 3% for FY22-24 on adjustment to its RM-US$ change fee assumption. It maintained “promote” on the inventory with a barely larger goal value of 83 sen.



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