Thursday 28 Mar 2024
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KUALA LUMPUR (Oct 19): CGS-CIMB said investors should take profit on glove stocks after the recent rally in their share prices, particularly Supermax Corp Bhd with a "reduce" call and a target price (TP) of 50 sen, and Top Glove Corp Bhd ("reduce"; 50 sen).

"In our view, earnings for both companies have not bottomed on a quarter-on-quarter basis. We expect quarterly losses in the upcoming quarters (3QCY2022 and 4QCY2022)," wrote analyst Walter Aw in a note, referring to the third and fourth quarters of calendar year 2022.

"For Hartalega Holdings Bhd, its share price is below our TP of RM2.30 ('reduce'), while we have a 'hold' on Kossan Rubber Industries Bhd (TP: RM1.38). Still, we note that there could be further downside risk to our earnings forecasts for both stocks if average selling prices (ASPs), currently at US$21 (RM99.12) per 1,000 pieces, do not recover (current ASP assumptions for the second half of 2022 and 1HCY2023: US$23-24)," he added.

Aw said the recent rally, where prices have risen by 9.3% to 29.3% over the past seven days, was likely driven by the positive news flow, as there were no fundamental changes to the sector.

The positive news included a weakening ringgit versus the US dollar, as glove makers are largely export-oriented with over 90% of their sales denominated in foreign currencies, as well as the emergence of new Covid-19 variants, namely XBB, BQ.1 and BQ1.1.

"However, channel checks with glove makers indicate continued weak demand, while there has been no increase in orders despite the emergence of new Covid-19 variants. Glove makers are reporting that their utilisation rate remains low at 50-55%. Costs remain elevated, while ASP hikes have been difficult to implement given the current supply-led industry dynamics. We expect ASPs to stabilise at US$20-21 per 1,000 pieces (below pre-pandemic levels), with slow recovery anticipated in the midterm (three to six months).

"While glove makers worldwide have slowed down their capacity expansion plans substantially, industry dynamics remain supply-led, with slow demand and an abundance of supply commissioned during the peak of the Covid-19 pandemic (2020-21). In our view, the oversupply situation would require at least one to two years to abate, before earnings of glove makers return to pre-pandemic levels," he added.

However, he noted that all glove companies are backed by strong net cash positions (RM600 million to RM2.8 billion), which could support cash flow requirements in the longer term.

"In addition, glove companies have also slowed down their capacity expansion and capital expenditure spending plans, thus helping to preserve their cash positions. Supermax has the highest net cash position among its peers at RM2.8 billion (at end-2QCY2022), but it has also earmarked RM1.6 billion for its US glove plant (which we estimate to be completed in 2HCY2023)," he said.

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