KUALA LUMPUR (June 23): Kenanga Research has downgraded the gloves sector to “underweight” (from "neutral") and said indications from its supply-demand analysis are pointing towards excess capacity in the sector spanning the next two years.

In a note on Thursday (June 23), the research house said it expects the weak operating environment to continue to weigh down glove makers over the medium term to long term.

Specifically, it said industry leader Top Glove Corp Bhd’s recently released results are already indicating weaker earnings ahead for glove makers suggesting that earnings have yet to bottom out.

The research house said this is due to crimped margins arising from the mismatch between average selling prices (ASPs) and inability to fully past cost through, further exacerbated by low industry plant utilisation averaging 50% to 60% which appears to likely persist over the medium term.

“The situation is further aggravated by the softening demand as evident from the low utilisation rate of glove players leading to oversupply putting pressure on ASPs coupled with customers’ reluctance to commit to sizeable orders as they expect selling prices to ease further.

“Our ratings are as follows: Hartalega Holdings Bhd (MP; TP: RM2.90), Top Glove (UP; TP: 80 sen), Kossan Rubber Industries Bhd (UP; TP: RM1.20) and Supermax Corp Bhd (UP; TP: 65 sen),” it said.