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JP Morgan turns bullish on Malaysian rubber gloves sector

Publish date: Thu, 28 Dec 2023, 11:52 AM

KUALA LUMPUR (Dec 28): JP Morgan Asia Pacific Equity Research said it has turned bullish on the Malaysian rubber gloves sector by going selectively (and non-consensus) with "overweight" ratings on Hartalega Holdings Bhd and Kossan Rubber Industries Bhd while retaining its "underweight" rating on Top Glove Corp Bhd.

In a note on Dec 27, the research house said the industry has witnessed a pick-up in demand following 2.5 years of inventory de-stocking.

JP Morgan said average selling price (ASP) has stabilised on tightening supply and demand, and producers will benefit from improved utilisation and the resulting operating leverage, though the recovery will be uneven across producers.

“Hartalega and Kossan have both returned to profitability while we expect Top Glove to only see profit in 3QCY2024 (third quarter of calendar year 2024).

“Hartalega and Kossan’s more efficient cost structures will also see them emerge from the downturn stronger, as we expect both Hartalega and Kossan to return to pre-Covid profitability by CY2025 while Top Glove’s 2025 estimated earnings will remain 46% below 2019,” it said.

JP Morgan said it values all players on 25 times 12-month forward earnings per share (price target end date December 2024).

“We are changing our valuation method to P/E (price-earnings) as the industry finally emerges from a downturn and returns to profitability, versus our prior methodology of asset replacement cost as industry recovery was uncertain and all glovemakers were loss-making previously.

“Key catalysts include the upcoming earnings improvement across producers thus confirming the sustainability of earnings and a calculated supply addition by Chinese producers,” it said.

JP Morgan said Hartalega has emerged stronger following the closure of less efficient lines (14 billion pieces) leading to depreciation and amortization savings of RM20 million/year.

“Kossan is most well capitalised.

“It has a net cash of RM2 billion (43% of market cap) and generates circa RM40 million-50 million of interest income. It has also rationalised capacity by nine billion,” it said.

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