This article first appeared in The Edge Financial Daily, on July 4, 2016.

KUALA LUMPUR: After the sharp fall of at least 20% in share prices since the start of the year, some quarters see value emerging in the glove manufacturing sector while others say there is absence of catalysts that could bring back the upward momentum.

Although the increase in production costs, as a result of higher natural gas price and wages, is not a major concern as glove makers could usually pass the increment on to customers, analysts opine the valuation of these stocks aren’t that attractive; in addition, there is concern about possible overcapacity in the industry.

Furthermore, the volatility of the ringgit against the US dollar also put a cap on the share prices of most export-oriented companies, including glove manufacturers. Possibly gone are the days when glove makers announced big leap in earnings.

Year to date, Top Glove Corp Bhd’s share price has declined 30.8%, those of Hartalega Holdings Bhd and Kossan Rubber Industries Bhd have fallen about 26%, while Supermax Corp Bhd’s nearly 34%.

Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng is among those who remain upbeat about the industry’s prospects.

“There is always concern about overcapacity as the players keep expanding. They (glove makers) will just have to wait a while for the demand to catch up. The industry is growing,” Ang told The Edge Financial Daily.

MIDF Research analyst Adam Mohamed Rahim said there are overcapacity concerns in the glove industry currently and they may continue in the near term.

“[But] I believe the global market will still be able to absorb [the] excess capacity. The majority of sales volume (more than 50%) for glove makers comes from developed markets,” he said.

“Global demand for gloves is growing around 6% to 8%. This is underpinned by the increase in awareness of healthcare regulations,” he told The Edge Financial Daily.

He opined that the glove counters are still attractive to investors despite the stronger ringgit compared with last year and the intense competition in the nitrile glove segment.

Hong Leong Investment Bank Research analyst Jason Tan expects capacity expansion to slow down in the second half of the year, but will accelerate in 2017, adding 16.5 billion pieces a year should there be no delay.

“Total capacity [of four glove companies] is likely to grow by only 8% in 2016 given some delay in expansion plans,” Tan wrote in his latest research note dated June 30.

“This could lead to an oversupply situation given annual demand growth of only 8% to 10%, putting pressure on the average selling price (ASP),” he commented.

With the share price retracement, he noted that sector valuation had eased to current 17.5 times from a high of 26 times, already close to the average price-earnings ratio (PER) band of 17 times.

“We expect the sector valuation to stay at [the] current level given the lack of fresh catalysts,” Tan added.

Malaysian Rubber Glove Manufacturers Association (Margma) last week warned its members to be cautious about their expansion plans, in order to ensure the stability of selling prices.

Expansion should be done “cautiously and not whimsically”, Margma said in a statement announcing an increase in selling prices as a result of the hike in gas price.

TA Securities analyst Wilson Loo opined that investors have to be selective as the near-term performance of glove manufacturers  may not be as strong as previously anticipated.

"After first quarter of 2016 results, consensus has revised calendar year 2016 earnings downwards. Price competition is widespread among players and this has weighed on their margins," he told The Edge Financial Daily.

His top pick is Kossan as the company is focusing on niche products to weather competition, and implementing measures to improve efficiency and trim headcount to lower labour costs.

A senior investment manager said the glove sector is not that attractive now although share prices of glove manufacturers have come down from their all-time high.

“I think they will be appealing when they trade at price-earnings ratio of about 15 to 16 times,” he told The Edge Financial Daily, but noted that the downside risks for glove counters are limited.

Currently, the average PER of the four biggest glove makers are about 18.71 times. Hartalega and Kossan are trading at trailing-12 month PER of 27.59 times and 20.95 times while Top Glove and Supermax are trading at trailing-12 month PER of 14.46 times and 11.86 times.