MIDF Research – one of the very few if not the only research house which has all of Malaysia’s Big-Four glove makers under its radar – has revised downward the target price (TP) of all its four counters following its imputation of lower average selling price (ASP) and higher cost assumption.
For Hartalega Holdings Bhd, MIDF Research’s new TP of RM3.09 (from RM4.31 previously) is based on 16.7 times FY3/2023F earnings per share (EPS) of 18.5 sen while its new TP for Kossan Rubber Industries Bhd’s is RM1.34 (from RM1.66 previously) is based on 10.2 times FY2023F EPS of 13.1 sen.
Meanwhile, the research house’s new TP for Supermax Corp Bhd of 88 sen (from RM1.09 previously) is based on FY6/2023F EPS of 10 sen pegged to the company’s price-to-earnings ratio (PER) of 8.8 times. The TP for Top Glove Corp Bhd is now RM1.04 (from RM1.29 previously) is premised on FY8/2023F EPS of 5.1 sen pegged to 20.4 times PER.
“We continue to remain ‘neutral’ on the glove sector due to the declining average selling price (ASP), rising raw material prices, freight costs and lack of imminent catalysts,” the research house pointed out.
“Risks to our call include (i) larger than expected movements in ASP; (ii) volatility in raw material prices; and (iii) exit of new entrants reducing the risk of oversupply.”
In MIDF Research’s view, the declining ASP has been the main constraint for the industry to expand. The downward trajectory in ASP was primarily caused by supply exceeding demand for the glove.
“The oversupply situation arises due to the nature of the business which has low entry barriers. The majority of the new entrants came because the business appears lucrative during the pandemic but the situation reversed when there are too many glove suppliers in the market,” justified the research house.
“Furthermore, the expansion plans by incumbent players have had an impact on the ASP. The combination of these two factors resulted in higher supply and competition, causing the ASP to fall.”
For 9M 2022, the ASP for latex powdered, latex powdered free, and nitrile gloves were at US$23, US$29, and US$30 per 1,000 pieces respectively. Moving forward, MIDF Research expects volume and value to continue falling before normalising.
“Nonetheless, we believe that the ASP will not return to pre-pandemic levels due to structural changes in glove usage and increased hygiene awareness,” noted the research house.
With the current industry utilisation rate being 50%-60%, MIDF Research further opined that the four glove companies will put on hold their new capacity expansion plans.
“The over-saturated market has affected the capabilities of the players to pass through higher production cost (labour, fuel and electricity) to consumer. This circumstance has had a significant impact on its earnings,” projected MIDF Research.
“As a result, the most immediate action they can take is to delay their expansion plan in order to stabilise the ASP.”
In this regard, Top Glove has announced that its plan to defer their expansion plan (total of 32 billion pieces of gloves) for the next four years.
“However, we believe that the effectiveness of limiting additional production will take some years before the market reaches its optimum demand/supply level,” added MIDF Research. – July 1, 2022