KUALA LUMPUR (March 20): Kenanga Research has maintained its “underperform” rating on Top Glove Corporation Bhd at 91.5 sen with an unchanged target price (TP) of 58 sen, and said it expects the operating environment to remain challenging in subsequent quarters, being plagued by massive oversupply, reluctance of customers to commit to sizeable orders and hold substantial stocks.
In a note on Monday (March 20), the research house said the Malaysian Rubber Glove Manufacturers Association (Margma) projects 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399 billion pieces in 2022.
“It believes the supply-demand equilibrium may return in six to nine months.
“However, we beg to differ, expecting the overcapacity situation to persist at least over the next two years,” it said.
Kenanga said based on its estimates, the demand-supply situation will only start to head towards equilibrium in 2025, when there is virtually no more new capacity coming onstream, while the global demand for gloves continues to rise by 15% per annum, underpinned by rising hygiene awareness.
Still, it said capacity is seen to expand further in 2023.
“We project the demand for gloves to rise by 15% in 2023, which is consistent with Margma’s forecast.
“However, this will do little to ease the overcapacity situation, as the global glove production capacity will grow another 16% to 595 billion pieces during the year, as more capacity planned by incumbent and new players during the pandemic years — enticed by super-fat margins that had evaporated — finally come online,” it said.
Kenanga said this will result in the excess capacity rising by 22% to 137 billion pieces, from 112 billion pieces in 2022.
It said the expanded overcapacity means low prices and depressed plant utilisation will likely persist in 2023.
“Not helping the already dire situation is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further decline in prices.
“We reiterate our 'underperform' call and TP of 58 sen based on 0.9 times FY2023F BVPS, at a 50% discount to the sector’s average of 1.7 times during the last downturns in 2008-2011 and 2014-2015, as we believe the current downturn could go down in history as one of the deepest ever.
“There is no adjustment to our TP based on ESG, given a three-star rating as appraised by us,” it said.