Maintain NEUTRAL. The recent round of results reported by glove makers suggests that glove makers’ earnings have yet to bottom out with ASP still hovering above pre-COVID levels. Based on the results announced by glove players, the following are our observations:- (i) players expects ASP to bottom out in another 1-2 quarters with higher latex gloves ASP (+5%) in Mar 2022 due to higher input raw material cost and oversupply to last between six to nine months; (ii) glove exporters could also be impacted by logistic challenges caused by the global shipping container shortage of which we understand is unlikely to abate over the next two quarters; (iii) some players expects better volume sales ahead as customers are more willing to ‘restock’ given ASP stabilisation and more normalised stock levels; (iv) following the uplift ing of the US CBP ban, TOPGLOV has managed to recover 80% of sales to the US; and (v) we expect margins in subsequent quarters to be impacted as raw material cost is not adjusting as fast as falling ASP and hence earnings could be lower sequentially which depends on the cost pass-through mechanism. Post COVID-19, inventory restocking cycle is expected to spur demand. Our ratings are as follows: HARTA (OP; TP: RM7.00) and TOPGLOV (UP; TP: RM1.30). KOSSAN (UP; TP: RM1.65) and SUPERMX (UP; TP: RM0.90).

Not out of the woods yet. The recent round of results reported by glove makers suggested that glove makers’ earnings have yet to bottom out with ASP still hovering above pre-COVID levels. Based on the results announced by glove players, the following are our observations:- (i) players expects ASP to bottom out in another 1-2 quarters with higher latex ASP (+5%) in Mar 2022 due to higher input raw material cost and oversupply to last between six to nine months; (ii) glove exporters could also be impacted by logistic challenges caused by the global shipping container shortage of which we understand is unlikely to abate over the next two quarters; (iii) some players expects better volume sales ahead as customers are more willing to ‘restock’ given ASP stabilisation and more normalised stock levels; (iv) following the uplifting of the US CBP ban, TOPGLOV has managed to recover 80% of sales to the US; and (v) we expect margins in subsequent quarters to be impacted as raw material cost is not adjusting as fast as falling ASP due to competitive pressure and hence earnings could be lower sequentially which depends on the cost-pass through mechanism. Post COVID-19, inventory restocking cycle is expected to spur demand. Labour accounts for an estimated 12% of production cost; for illustrative purposes, a 25% increase in minimum wage to RM1,500 is expected to hit players' production cost by 3%. Based on our back of the envelope calculation, their bottom-line could be mitigated with a 0.2% increase in ASP.

Maintain NEUTRAL. HARTA (OP; TP: RM7.00). In the 3QFY22 results briefing, management highlighted that there are back logged orders yet to be delivered; hence, not captured in 3QFY22 sales due to shipping delay. The group expects utilisation to hover between 65% and 75% as they expect uptick in orders. The seemingly low 3QFY22 utilisation rate of 55% was largely due to delay in shipment caused by vessels constraints and we expect the one-off additional prosperity tax, to the tune of RM300m RM400m, to hit its 4QFY22 earnings.

SUCB (UP; TP: RM0.90) Going forward, earnings in subsequent quarters are expected to be impacted by: (i) potential revenue loss from US CBP WRO which accounts for 20% of sales, (ii) ASP normalising faster than expected, and (ii) impact from one-off prosperity tax in FY22. In the meantime, margins in subsequent quarters could be impacted as raw material cost is not adjusting as fast as falling ASP and hence earnings could be lower sequentially. Recall that CBP issued a Withhold Release Order (WRO) against SUCB which identified 10 of the International Labour Organization’s indicators of forced labour in manufacturing operations during its investigation. Note that the US accounts for approximately 20% of sales. The impact severity on earnings depends on: (i) how fast Supermax can replace the loss of sales to the US, and (ii) how long it takes the group to resolve the issue. Note that it took almost a year for TOPGLOV to be cleared of the ban.

TOPGLOV (UP; TP: RM1.30). Key takeaways from the recent post-results conference call are as follow:- (i) management expects ASP to bottom out in another 1-2 quarters with higher latex ASP (+5%) in Mar 2022 due to higher input raw material cost and oversupply to last between six to nine months; (ii) the group could also be impacted by logistic challenges caused by the global shipping container shortage of which we understand is unlikely to abate over the next two quarters; (iii) management expect better volume sales ahead as customers are more willing to ‘restock’ given ASP stabilisation and more normalised stock levels; (iv) following the uplifting of the US CBP ban, the group managed to recover 80% of sales to the US; and (v) we expect margins in subsequent quarters to be impacted as raw material cost is not adjusting as fast as falling ASP and hence earnings could be lower sequentially which depends on the cost pass-through mechanism. Post COVID-19, inventory restocking cycle is expected to spur demand.

KOSSAN (UP; TP: RM1.65). The group highlighted that the performance in the quarter was also affected by logistic challenges caused by the global shipping container shortage of which we understand is unlikely to abate over the next two quarters. In the meantime, margins in subsequent quarters could be impacted as raw material cost is not adjusting as fast as falling ASP and hence earnings is expected to be lower sequentially in 1Q22. Downgrade from MP to UP.

Source: Kenanga Research - 5 Apr 2022