JP Morgan said that despite improving fundamentals, the recovery would be uneven across producers.
PETALING JAYA: Following more than two years of de-stocking, the glove industry is now witnessing a pick-up in demand.
The sector is also seeing a stabilisation of average selling prices (ASPs) due to the tightening in supply-and-demand, and producers are expected to benefit from improved utilisation and the resulting operating leverage.
Turning increasingly bullish on the glove sector, JP Morgan upgraded the sector outlook by going “selectively overweight”. The investment bank noted that despite improving fundamentals, the recovery would be uneven across producers.
In its report yesterday, JP Morgan revealed that it was now “overweight” on Hartalega Holdings Bhd
and Kossan Rubber Industries Bhd, but it remained “underweight” on Top Glove Corp Bhd.
“We think the re-stocking can sustain into 2024-2025 based on our supply-and-demand analysis on the key assumption that global glove demand will be 337 billion and 349 billion pieces in 2024 and 2025, respectively,” JP Morgan explained.
It noted the estimates represented a five-year organic compounded annual growth rate of 3.5% since 2019 of 284 billion pieces.
“Our checks with China’s largest producer Intco indicated its utilisation is full and that the company will look to supply discipline, going only on a measured supply expansion when demand recovers strongly, specifically around eight billion to 10 billion of capacity expansion, or 2% of global capacity beginning sometime in 2024 (with a seven-to-eight-month construction lead-time),” it added.
With China producers (Intco, Blue Sail) running at maximum utilisation currently, JP Morgan said the incremental volume would accrue to ex-China producers such as those in Malaysia and Thailand. This underpinned its thesis of a sequential recovery in profitability.
“ASP has also stabilised in view of tightening supply-and-demand, and producers will now benefit from improved utilisation. It’s easier to forecast supply than demand given the relative inelasticity of the former,” JP Morgan said.
“We will track capacity expansion plans by the Chinese players, and this will be the next inflection point for the sector,” it added.
On Hartalega and Kossan, the brokerage noted that while both companies had returned to profitability, Top Glove was expected to only see profit in the third quarter of 2024.
“Hartalega and Kossan’s more efficient cost structures will also see them emerge from the downturn stronger, as we expect both Hartalega and Kossan to return to pre-Covid profitability by 2025, while Top Glove’s 2025 estimated earnings would remain 46% below 2019,” it explained.
JP Morgan valued all players on 25 times forward earnings, and it revealed that it had changed its valuation method to price-to-earnings as the industry had emerged from a downturn and returned to profitability.
This was in contrast to its prior methodology of asset replacement cost due to uncertainty regarding the industry’s recovery and the fact that all glovemakers were loss-making previously.
Its target price for Hartalega had been raised to RM3.20 from RM1.20 previously, while that for Kossan was revised to RM2.30 from RM1.40.
For Top Glove, the target price was increased to 70 sen from 48 sen previously.
