1HFY23 PATAMI of RM116.6m (-96% YoY) came in below expectations at 42%/37% of our/consensus full-year forecasts. The variance against our forecast came largely from the weaker-than-expected sales volume and utilisation rate. Hence, FY23F/FY24F net profit is downgraded by 39%/26% to reflect the lower utilisation rate. We reduce our TP by 8% to RM1.54 based on 1.0x FY24F BVPS, at a 40% discount to the sector’s average of 1.7x charted during the last downturn in 2008-2011. Downgrade from MARKET PERFORM to UNDERPERFORM.

QoQ, 2QFY23 revenue fell 31% due to lower ASP (-2%) and volume sales (-30%). The lower volume sales were due to weakening demand which dragged down utilisation rate to 49% in 2QFY23 vs. 70% in 1QFY23. EBITDA margin decreased by 9ppt from 23% in 1QFY23 to 14% in 2QFY23 due to lower-than-expected plant utilisation rate and higher operating cost, indicating lower absorption cost per unit. This brings 2QFY23 net profit to RM28m (-68%). No dividend was declared in 2QFY23 which came in below our expectation. YoY, 1HFY23 revenue fell 76%, due to lower ASP (-68%) and sales volume (-26%). As a result, 1HFY23 PATAMI fell 96%.

The key takeaways from the analysts briefing yesterday are as follows:

1. The group highlighted that prospect of raising ASP is challenging due to the current oversupply situation. Due to the current competitive pressure emanating from oversupply and low industry utilisation averaging 50%, 2QFY23 ASP of USD24-25/1,000 pieces is expected to trend lower in subsequent quarters towards USD20/1,000 pieces (compared to our FY23F/FY24F assumption of USD22/USD20 per 1,000 pieces).

2. It has deferred its expansion plans in 2023 namely NGC 1.5 (19b pieces/annum which could have raised its capacity by 43%) given the depressed utilisation of only about 50% across the industry at present.

3. In an effort to further reduce reliance on manual labour, the group manage to complete the final jigsaw to fully automate its production processes following completion of retrofitting its automated packing machine which has went live in one of its plants.

4. It expects oversupply and competitive pressure to persist at least over the next two quarters which is more optimistic as compared with our view of 2024 based on our demand and supply projections.

Outlook. As a result of massive capacity expansion by incumbent players as well as new players influx during the pandemic years — enticed by the then super fat margins that had since evaporated — we estimate that the global glove manufacturing capacity has jumped by 22% to 511b pieces in 2022. 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 10% in 2022 to 387b pieces (partly also due to the destocking activities along the distribution network). This will result in an excess supply of 124b pieces (assuming, hypothetically, capacity utilisation is maximised). In 2023, we estimate that the global glove manufacturing capacity will 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 ballooning further to 150b pieces.

Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 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.

FY23F/FY24F net profit is downgraded by 39%/26% as we reduce respective utilisation to 50%/55% from 65%/65%. We also reduce FY23F EBIDTA margin to 16% from 17% but maintain FY24F EBITDA margin assumption.

Downgrade from MARKET PERFORM to UNDERPERFORM. We rationalise our valuation basis to asset-based (from earnings-based previously) as we believe its earnings will remain depressed at least over the next 12-18 months. We reduce our TP by 8% to RM1.54 based on 1.0x FY24F BVPS, at a 40% discount to the sector’s average of 1.7x charted during previous downturns in 2008-2011 and 2014-2015 as we believe the current downturn could be one of the deepest ever. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us. We are cautious on the stock due to: (i) oversupply to persist in the sector over the next two years as a result of massive capacity expansion by incumbent as well as new players during the pandemic years amplified by industry low utilisation rate averaging 40-50% implying weakening demand, and (ii) ASP yet to bottom out.

Key risks to our recommendation: (i) the industry turning the corner sooner on stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (ii) industry consolidation reducing competition among players, and (iii) epidemic and pandemic occurrences.

Source: Kenanga Research - 9 Nov 2022