UOBKH sees negative risk-reward payoff in Malaysia glove sector, advises minimal exposure

UOB Kay Hian (UOBKH) is maintaining its "underweight" recommendation on Malaysia's glove sector, as it believes the rate of normalisation for demand and average selling prices (ASPs) is swifter than expected.

This comes after the sector reported slight sequential overall growth in Q2 of 2021, a period which UOBKH believes to signify peak quarterly earnings.

Most stocks under its coverage came in either within or beyond the research house's expectations except for Top Glove, whose volume sales were affected by its withhold release order issued by the US Customs and Border Protection in July last year.

In a report on Wednesday, analyst Philip Wong noted that nitrile ASPs have moderated slightly ahead of expectations, and said he now anticipates ASPs to normalise sooner in mid-2022 compared to 2023 previously.

The analyst is expecting 2021 and 2022 sector net profit to grow year on year by 62 per cent and subsequently decline 82 per cent on-year, respectively.

"Given the sharpness of moderating ASPs and the laggard effect by consensus to factor in down-trending ASPs, this forms downside to consensus earnings expectations relative to ours," said Mr Wong.

UOBKH's sector net profit estimates now stand at 4 per cent, 28 per cent and 34 per cent below consensus projections at this juncture.

"Factoring in the softened ASPs alone, our earnings projections already suggest significant downside to consensus expectations. Against this backdrop, there could be further downside to both sentiment and earnings going forward," he noted.

He nonetheless remains positive on the downtrend of raw material prices and expects both nitrile and latex costs to normalise in the near term.

"We believe deferred capacity expansion and sub-optimal utilisation rates may not be fully factored in yet... Capacity expansion plans and its subsequent deferment and sub-optimal utilisation rates could represent significant downside to our forecast should industry dynamics moderate too sharply," said Mr Wong.

The analyst is expecting overall production output in Q3 of 2021 to be 25 per cent below peak utilisation rates, due to ongoing pandemic restrictions on Malaysia's labour workforce.

"Given the unfavourable reward-to-risk payoff, we suggest investors to minimise their exposure to the sector," he added.

READ MORE:

• Malaysia's rubber glove boom spotlights longtime labour standards issues
• Malaysia glove makers say virus curbs to hit global supplies
• UOBKH downgrades Malaysia glove sector; Top Glove remains top pick