Glove sector downgraded to ‘Neutral’ on declining ASP, ESG pressure

Improving Covid-19 situation in the US and EU has resulted in a much lesser urgency to immediately replenish inventories


THE average selling price (ASP) of rubber gloves is expected to decline gradually in the second half of 2021 (2H21), albeit still elevated compared to pre-Covid-19 prices.

Public Investment Bank Bhd (PublicInvest) analyst Chua Siu Li said improving Covid-19 situation in the US and the European Union (EU) has resulted in a much lesser urgency for distributors to immediately replenish inventories back to its usual two to three months’ level.

“We understand distributors’ current inventory levels are at around one month and the buyers are adopting a ‘wait and see’ approach to avoid locking in purchases at high prices.

“On a side note, Top Glove Corp Bhd is redirecting its capacity earlier allocated for the US to EU market, causing stiffer competition for glovemakers in the EU currently.

“The improved Covid-19 situation in both the US and EU, as well as stiffer competition in EU, will lead to lower glove ASPs in 2H21, in our opinion,” Chua wrote in a research note yesterday.

PublicInvest has lowered the rubber glove sector’s earnings projections for the financial year 2021 (FY21)-FY24 forecast by 10%-51%, on the back of lower ASP assumption.

The investment bank downgraded its rating for Kossan Rubber Industries Bhd to ‘Neutral’ with a lowered target price (TP) of RM3.65, while maintaining a ‘Neutral’ call on Top Glove Bhd (TP: RM4.40).

Its preferred exposure for the sector is Hartalega Holdings Bhd, due to its superior margins pre-Covid-19, and continues to rate the company as ‘Outperform’ (TP: RM9.75).

Consequently, PublicInvest also downgraded its call on the rubber glove sector to ‘Neutral’.

Chua said the lead time on orders has fallen for Hartalega and Top Glove to less than 120 days currently from 150 days and 170 days respectively.

The analyst added that Top Glove is no longer receiving spot orders, given the readily available capacities to be taken up by buyers.

She also wrote that Kossan’s capacities for 2021 had been fully sold.

Chua said raw material prices are expected to decline come 2H21 as the tight supplies for nitrile butadiene latex continues to ease and better yield for latex concentrate after the end of wintering season in May.

She also highlighted that environment, social and governance (ESG) benchmarks are key in valuation of glovemakers.

Following the US Customs and Border Protection’s (CBP) ban on Top Glove’s shipment from entering the US in May, a labour rights activist, Andy Hall, has recently petitioned for the CBP to investigate Hartalega on allegations of forced labour.

However, she noted it is still uncertain whether the CBP has launched an active investigation at this juncture.

Despite the allegations, she said Hartalega had taken several measures before the complaint was lodged to ensure its operations are free from the forced labour allegations.

Top Glove and Hartalega have also paid remediation payments of RM140 million and RM41 million in full respectively, while Kossan targets to fully reimburse the total sum of RM54 million to the migrant workers by the end-June.

PublicInvest noted glovemakers’ commitment to step up on their social compliance practices going forward, despite already exceeding the standards on certain aspects. As a result, it will translate to higher costs in the future.

“Better practices would translate to higher costs, and we are of the view that it would take time for glovemakers to fully pass on the cost increase to buyers. This would result in slight margin compression in the short term,” Chua wrote.