9MFY22 PATAMI of RM159m (-94%YoY) came in at 98%/78% of our/consensus full-year forecast. We consider the results as within our expectation as its prospects will remain weak with ASP having yet to bottom out. We believe the oversupply situation in the industry will persist at least over the next 2-3 years. We maintain our FY22F/FY23F numbers. Our TP is RM0.85 based on 14x FY23F EPS, at a 35% discount to peers’ average to reflect its smaller market capitalization after imputing a 5% discount for a 2-star ESG rating as appraised by us. Reiterate UNDERPERFORM.

QoQ, 3QFY22 revenue fell 5% due to lower gloves sales (-10%) but negated by technical rubber products (+68% albeit from a lower base). Gloves revenue fell 10% due to lower ASP (-3%) and volume sales (- 15%). EBITDA margin decreased by 7ppt from 16% in 2QFY22 to 9% in 3QFY22 due to lower ASP and exacerbated by higher input nitrile cost (+8-+12%) indicating lower absorption cost per unit. This brings 3QFY22 net profit to RM23m (-49%). No dividend was declared for the quarter as expected.

YoY, 9MFY22 revenue fell 68% due to lower ASP (-63%) and volume sales (-25%). As a result, 9MFY22 PATAMI fell 94%.

Outlook. MARGMA hold the view that: (i) the global demand for rubber gloves is expected to return to growth in 2023 averaging between 12-15% per annum, after a 19% contraction to an estimated 399b pieces in 2022, and (ii) as such, supply-demand equilibrium will return in 6-9 months. However, we are less optimistic and expect oversupply to persist over the next 12-24 months. Based on our estimates, the demand-supply situation will only start to head towards an equilibrium in 2025 (against MARGMA’s forecast of a supply-demand equilibrium in six to nine months) when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. Our supply-demand projections are pointing towards a persistent oversupply over the next two years.

As a result of massive capacity expansion by incumbent players as well as new players during the pandemic years — enticed by the super fat margins that had eventually evaporated — we estimate that the global glove manufacturing capacity is poised to jump by 22% to 511b pieces in 2022 (see chart on page 2). On the other hand, as more countries come out the other end of the pandemic, we project the global demand for gloves to ease by 19% in 2022 to 399b pieces (partly also due to the destocking activities along the distribution network). This will result in an excess supply of 112b pieces (assuming, hypothetically, capacity utilisation is maximised). In 2023, we estimate that the global glove manufacturing capacity to surge by another 16% to 595b pieces (as more capacity planned during the pandemic years finally comes on-line) while the global demand for gloves shall resume its organic growth of 15% annually (taking our cue from MARGMA’s projection of 10-15% growth in global glove demand yearly), resulting in the excess supply rising further to 136b pieces.

Maintain UP. We maintain our FY22F/FY23F numbers. Our TP is RM0.85 based on 14x FY23F EPS, at a 35% discount to peers’ average to reflect its smaller market capitalization after imputing a 5% discount for a 2-star ESG rating as appraised by us.

Key risks to our recommendation: (i) stronger-than-expected growth in demand for gloves as health awareness rises faster globally, (ii) epidemic and pandemic occurrences, and (iii) a sharp fall in input cost

Source: Kenanga Research - 3 Nov 2022