HARTA is shutting down its aging Bestari Jaya (BJ) plant that houses 30% of its total capacity by end-2023 at a total cost of RM417m to be incurred over two years. We believe this could be the first sign of something major heading towards the sector amidst the massive industry over-capacity. We now forecast RM330m net loss for FY23 (vs. net profit of RM24m previously) and more than triple our FY24F net loss to RM82m. We also reduce our TP by 4% to RM1.30 (from RM1.35) and keep our UNDERPERFORM call.

Decommissioning BJ production facility. HARTA is decommissioning its BJ production facility, and consolidating operations at its Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang. BJ consists of 4 production plants with 40 production lines or 13b pieces per annum. The decommissioning will reduce its production capacity by 30% to 31b pieces per annum and is expected to be completed by end- 2023.

We believe HARTA is making a hard decision here, having considered factors such as: (i) the old technology of the plant which is labour intensive and less energy-efficient by current standards, and (ii) the plant which commenced in 2004 is aging which means high maintenance cost. Due to challenging massive global overcapacity, we believe the plant is also likely to sit idle over the next 12-18 months anyway.

It guided for an impairment loss of RM347m in FY23 and further provision for retrenchment costs and expenses of RM70m in FY24.

Forecasts. Correspondingly, we now forecast a loss of RM330m in FY23F against a profit of RM24m previously. We triple our FY24F net loss to RM82m (from RM24m).

Outlook. MARGMA projects 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399b pieces in 2022. It believes the supply-demand equilibrium may return in 6-9 months. However, we beg to differ, expecting the overcapacity situation to persist at least over the next two years. 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. Still, capacity is seen to expand further in 2023.

We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. However, this will do little to ease the overcapacity situation as the global glove production capacity will grow by 16% to 595b pieces during the year as more capacity planned by incumbent and new players during the pandemic years — enticed by super-fat margins that had evaporated — finally come online. This will result in the excess capacity rising by 22% to 137b pieces from 112b pieces in 2022. The expanded overcapacity means that low prices and depressed plant utilisation will likely persist in 2023. Not helping the already dire situation is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of a further decline in prices.

Reiterate UNDERPERFORM. We reduce our TP by 4% to RM1.30 from RM1.35 based on 0.9x FY24F BVPS, at a 50% (previously 40%) discount to the sector’s average of 1.7x charted during previous downturns in 2008-2011 and 2014-2015 as we sense that the current downturn is getting longer and deeper than we had initially thought. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). We are cautious on the stock as the massive overcapacity in the global glove market means low prices and depressed plant utilisation will likely to persist over the next 1-2 years. Adding salt to the wound is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further decline in prices.

Key risks to our recommendation: (i) the industry turning the corner sooner on stronger-than-expected growth of 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 May 2023