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KUALA LUMPUR: Earnings for glove companies stay muted, as demand-supply dynamics remain unbalanced.
UOB Kay Hian Research in a report yesterday said small-cap glove producers have already been experiencing operational losses.
“We believe Chinese producers could be close to the same predicament, with them registering earnings before interest, taxes, depreciation and amortisation (ebitda) margins of 3.4% on average in the recent quarter.
“These indicate that the industry is nearing the bottom, given the unsustainability of such operating conditions.”
Due to the temporary nature of the sector bottoming, as well as the long-term structural growth the industry offers, UOBKH Research said investor interest may be swiftly piqued to the bottom.
“Current valuations are trading close to minus-one standard deviation of its five-year pre-pandemic price-to-earnings mean.
“The reward-to-risk payoff appears balanced. We advocate investors to accumulate on potential significant weakness, given earnings could undershoot expectations.”,
For the first quarter of 2022, UOBKH Research said sector earnings came in below expectations.
“This was due to the deep imbalance between demand and supply, which weighed heavily on average selling prices (ASPs) amid rising costs.”
The research house noted that Supermax Corp Bhd was further weighed down by its sales ban by the US Customs and Border Protection (CBP), which also affected its Canada sales.
“The sector’s top-line contracted 12.9% quarter-on-quarter off a 17% decline in ASPs, but volume sales recovered 5% as supply chain issues eased.”
UOBKH Research said the sector registered ebitda and net profit margins of 14.4% and 0.5%, respectively.
“Had it not been for Hartalega Holdings Bhd’s backloaded tax expense (attributed to the prosperity tax), the sector would have realised an adjusted net profit margin of 10.3%. Pre-pandemic (2019) ebitda and net profit margins were 17.5% and 10.2%, respectively.”
UOBKH Research expects sales volume growth for Malaysia’s big-four glove producers (namely Supermax, Hartalega, Kossan Rubber Industries Bhd and Top Glove Corp Bhd) to be at 5.9% and 15.1% for 2023 and 2024, respectively.
“This will be driven by higher utilisation, given that utilisation during the first quarter of 2022 was close to only 60%. The optimal range is between 80% and 90%.”