Plant utilisation of rubber glove makers improve

opportunity for investors to bottom fish for stocks

“We believe that Kossan’s PU in 1Q24 should be as high as Hartalega, given their similarity in terms of product mix, customer profile and selling prices that are supported by Kossan’s low-cost structure.”

Aminvestment Bank Research

PETALING JAYA: While many are still bearish on the glove sector, Aminvestment Bank Research (Amresearch) has an “overweight” call, and is of the view that there is an opportunity for investors to bottom fish for stocks like Hartalega Holdings Bhd and Kossan Rubber Industries Bhd.

It notes that the recent share price weaknesses for Hartalega and Kossan were predominantly due to the market pricing in the weaker-than-expected results reported by both companies last month, as investors were sceptical on the timeliness of demand recovery.

“Nevertheless, we view this as an opportunity for investors to bottom fish for Hartalega and Kossan as their high plant utilisation (PU) of 90% in March 2024 and continued quality issues among Chinese glove makers could meaningfully address doubts about demand recovery and re-catalyse market interest,” the research firm said in a report.

It said both Hartalega and Kossan missed its expectations and consensus’, primarily attributable to lower-than expected sales volume as a result of Red Sea-related shipment delays.

For instance, it pointed out that Hartalega experienced a delay of 600 million pieces of medical rubber gloves or 13% of fourth quarter 2023 (4Q23) sales volume.

Assuming these rubber gloves were sold at an average selling price of US$19-US$20 per 1,000 pieces and deducting 40% of revenue for variable costs, Amresearch estimates that pre-tax loss associated with the Red Sea crisis was Rm30mil in 4Q23.

“This implies total profit before tax in 4Q23 at Rm38mil (versus the reported Rm8mil), which was higher than Rm34mil in 3Q23 and our earlier forecast.”

As for Top Glove Corp Bhd, the narrowing of losses for three consecutive quarters were largely above expectations, coming on the back of cost-cutting initiatives.

In 1Q24, the research firm sees demand recovery but it will be asymmetrical.

Hartalega’s PU improved month-onmonth and will be able to achieve about 90% in March 2024, compared to 58% in 4Q23.

“In 2Q24, Hartalega is confident in maintaining 90% PU based on guidance from customers.

“We believe that Kossan’s PU in 1Q24 should be as high as Hartalega, given their similarity in terms of product mix, customer profile and selling prices that are supported by Kossan’s low-cost structure.”

As for Top Glove, its PU has also improved from 22% in 4Q23 to 32% in March 2024, based on installed capacity of 95 billion pieces per year.

“The PU recovery of these three glove makers in 1Q24 substantiates our earlier view that inventory replenishment of rubber gloves could commence by 1Q24 without a need to reduce average selling prices.

“Additionally, the relatively stronger recoveries observed in Hartalega and Kossan support our opinion that the pace of recovery could be asymmetrical among Malaysian players,” said Amresearch.

Going forward, it does not anticipate any material capacity expansion from China.

Therefore, any nitrile medical rubber glove inventory replenishment beginning since 1Q24 could mostly be sourced from Malaysia.

The research firm has a fair value of RM3.20 per share on Hartalega and RM2.26 for Kossan.

Meanwhile, it has maintained a “hold” call on Top Glove with a fair value of 86 sen.