Hartalega Holdings REDUCE, TP RM2.30, RM1.92 close
Even though Hartalega’s share price has risen by 12.8% over the past seven days, we see downside risks to earnings given its weaker-than-estimated ASPs. We keep our FY23-25F EPS estimates unchanged pending better visibility for ASPs in the coming months. Reiterate Reduce.
Supermax Corp REDUCE, TP RM0.50, RM0.885 close
While SUCB is currently trading below its NTA of RM1.89/share, our Reduce call remains intact given that the bulk of its cash is earmarked for the building of its US glove plant (RM1.6bn, 57% of total net cash position).
Top Glove Corporation REDUCE, TP RM0.50, RM0.74 close
TOPG is the world’s largest glove maker by production capacity (100bn pieces p.a.). However, given its lower net cash position compared to glovemaker peers in our coverage, we expect TOPG to record the largest decline in net profit in FY23F due to its high base (profitability was the highest during the peak of the Covid-19 pandemic).
Tough times remain
- We advocate investors take profit on glovemaker stocks given the recent rally in their share prices (up 9.3-29.3% over the past seven days).
- We do not see any fundamental reason for the rally as the sector outlook remains weak (oversupply situation and weak demand from buyers).
- We have Reduce calls on three glove makers, and a Hold call on Kossan.
A relief rally for glove stocks
? Glove stocks under our coverage (SUCB, KRI, HART and TOPG) have rallied by 9.3%-
29.3% over the past seven days. In our view, there have been no fundamental changes
to the sector, but positive newsflow that could have driven the re-rating include: i) a
weaker ringgit vs. US$ (glove makers are export-orientated with >90% sales in foreign
currency), and ii) new Covid-19 variants emerging worldwide (XBB, BQ.1 and BQ.1.1).
Demand remains weak; slow demand from glove buyers
? However, channel checks with glovemakers indicate continued weak demand, while
there has been no increase in orders despite the emergence of new Covid-19 variants.
Glovemakers are reporting that 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 1k pieces (below prepandemic levels), with slow recovery anticipated in the mid-term (3-6 months).
Would require 1-2 years to return to pre-pandemic earnings levels
? While glovemakers 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-
2021). In our view, the oversupply situation would require at least 1-2 years to abate,
before earnings of glovemakers return to their pre-pandemic levels.
Backed by strong net cash position to withstand any cash burn
? On a positive note, all glove companies are backed by strong net cash positions
(RM0.6bn-2.8bn) which could support cash flow requirements in the longer term. In
addition, glove companies have also slowed down their capacity expansion and capex
spending plans, thus helping to preserve their cash positions. SUCB has the highest net
cash position among its peers of RM2.8bn (at end-2QCY22), but it has also earmarked
RM1.6bn of this for its US glove plant (we estimate to be completed in 2HCY23F).
Sell on strength: worst is yet to come
? In our view, investors should take the opportunity to take profit on glove stocks at this
juncture, particularly for SUCB (Reduce, TP: RM0.50) and TOPG (Reduce, TP:
RM0.50). In our view, earnings for both companies have not bottomed on a qoq basis;
we expect quarterly losses in the upcoming quarters (3QCY22F and 4QCY22F). For
Hartalega, its share price is below our TP of RM2.30 (currently Reduce call), while we
have a Hold on Kossan (TP: RM1.38). Still, we note that there could be further downside
risks to our earnings forecasts for both stocks if ASPs (currently at US$21 per 1k pieces)
do not recover (current ASP assumptions for 2H22-1H23: US$23-24).