UOBKH expects narrowing H2 losses for Malaysia’s glove sector, flags deep value opportunity
Michelle Zhu
AFTER reporting unprecedented losses for the fourth quarter of 2022, the Malaysian glove sector is expected to bottom out in the first half of 2023, before gradually returning to profitability.
UOB Kay Hian (UOBKH) upgraded its sector rating to “overweight” from “market weight” on the belief that corporate losses should narrow in H2 2023, against the backdrop of an improving average selling price (ASP) outlook and moderating costs.
Citing Malaysian glove producers’ expectations of an ASP revision heading into Q2 2023, the research house is assuming US$24 per 1,000 pieces of gloves for 2024 as it views current ASPs as “unsustainable”.
“We expect earnings to bottom out in H1 2023, but ASPs are due to finally see a positive and meaningful adjustment across competing regional producers as well. In addition, with costs expected to moderate in H2 2023, we expect losses to narrow,” said analyst Philip Wong on Tuesday (Mar 21).
In his view, the sector’s quarterly earnings are due to bottom out from Q1 to Q2 in 2023 against the backdrop of higher energy and raw material costs. Wong believes that by H2 2023, higher ASPs will be realised as costs also moderate across natural gas tariffs and raw materials, and that this could restore some glove companies to breakeven levels.
Overall, the sector is projected to sink into the red with a loss of RM92 million (S$27.5 million) in 2023, from earnings of RM1 billion in 2022.
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Wong then expects recovering ASPs and utilisation rates to drive 2024’s sector earnings, leading the sector to eventually report earnings of RM655 million in 2024.
The analyst also highlighted that sector valuations are currently trading close to one standard deviation above the mean to “merely recovering” 2024 earnings estimates.
This suggests deep value when 2025 earnings projections are taken into perspective, he said, referring to the investing strategy which focuses on buying the cheapest stocks based on their valuation multiple.
“Given the backdrop of improving fundamentals and a medium-term view of bargain valuations, the reward-to-risk payoff appears favourable,” concluded Wong.
Kuala Lumpur Stock Exchange-listed nitrile glove manufacturer Hartalega is the brokerage’s top sector pick for its above-industry operating efficiency, and relative upside versus its peers.
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