KUALA LUMPUR (March 27): MIDF Research has maintained its “negative” rating on the glove sector and said the raw material price fluctuation will affect the production cost of Malaysian glovemakers, namely Hartalega Holdings Bhd (neutral, target price [TP]: RM1.80), Kossan Rubber Industries Bhd (sell, TP: 95 sen), and Top Glove Corp Bhd (sell, TP: 55 sen).

In a note on Monday (March 27), the research house said raw material prices for glove manufacturers are still on a roller coaster ride in the near term.

“We gather that certain buyers may engage in some restocking activities in the near term amid the old inventory that is expected to [be] depleted by the end of 2023.

“However, we expect that the restocking activities will remain lacklustre given that most countries have transitioned to an endemic phase post-border reopening.

“Margma (Malaysian Rubber Glove Manufacturers Association) is currently anticipating the global glove demand to normalise to pre-pandemic levels in 2023 (300 billion pieces of gloves) as compared to 280 billion pieces of gloves in 2018 and 340 billion pieces of gloves in 2019,” it said.

MIDF said with a normalised annual growth, it expects the demand for gloves throughout the world to normalise to pre-pandemic level.

The research house said the industry utilisation rate fell from 35%-40% in the fourth quarter of calendar year 2022 (4QCY2022) to 32%-35% in 1QCY2023, after excluding temporarily shut downed inefficient plants.

It said all the glove makers under its coverage are trading at a discount of 33%-52% to their two-year historical mean price-to-book value.

“We believe that this is justifiable, considering the continuous downside risk to their companies' profitability.

“Hence, we're holding off on bottom fishing until we have more information about the customer reaction to the average selling price hike,” it said.

MIDF said it remains cautious about the outlook due to the continuous intense competition combined with the normalising glove demand which resulted in the oversupply of gloves.

“Hence, we maintain our view that the demand-supply dynamic is unlikely to revert to normal at least in the next one year.

“Our top pick for the sector is Hartalega.

“We prefer Hartalega due to its substantial net cash position of RM1.9 billion (equivalent to 27% of market capitalisation), which may serve as a buffer against any potential downside risk. We also prefer Hartalega because of its ability to generate positive operating cash flow despite multiple headwinds,” it said.