GLOVE companies may have seen much of their earnings already bottom out, with reward-to-risk payoffs appearing to be more balanced now.

       In upgrading the sector to “market weight”, UOB Kay Hian Research says the sector is expected to bottom over the immediate-term.

       “While sentiment could decline in tandem with the sector bottoming out, we think downside risks to earnings have largely been factored in.

       “Thus, the reward-to-risk payoff appears balanced at this juncture, prompting us to upgrade the sector,” it tells clients in a report on the sector.

       Glove companies reported financial results that were disappointing to say the least in the most recent quarter, but this was not at all surprising, given that their profits were extraordinary over the last couple of years due to the Covid-19 pandemic.

       To be sure, average selling prices (ASPs) of gloves have already been on a steep downtrend in the last few months, moving closer to “normal” prices in tandem with the pandemic transitioning to an endemic both here and globally. One glove player for one, believes that the worst could be over for ASPs.

       Iconic Worldwide Bhd group executive director James Tan says current ASPs of gloves in general, have reached pre-pandemic levels.

       CEO and fund manager at Fortress Capital Asset Management Thomas Yong has not turned positive on the sector yet.

       “We foresee prices to start climbing back up over the next couple of months even as the costs of other things like labour and natural gas remain high or move even higher,” Tan tells StarBizWeek.

       Penang-based Iconic is a relatively new kid on the block, going into the personal protective equipment (PPE) industry as late as last year, after the pandemic had already started.

       Its new Batu Kawan factory currently sees six glove production lines running at an over 80% utilisation rate, collectively.

       “Another six lines should be ready by April,” Tan says.

       He says as the factory and business are still fairly new, Iconic, which is also involved in hotel and property development is trying to control its costs as a way to help boost margins.

       “Margins-wise, we are trying to minimise costs and improve our processes in order to help grow it.”

       Tan says demand for its gloves, “is there.”

       “Some 99% of our gloves are exported,” he adds.

       Meanwhile, CEO and fund manager at Fortress Capital Asset Management Thomas Yong has not turned positive on the sector yet.

       “We expect further erosion of ASPs and also a (sales) volume decline after the high base observed last year,” he tells StarBizWeek.

       Yong points out that there has been significant recent capacity addition, especially out of China.

       “These new producers may aggressively fight for market share at the expense of profit margins,” Yong adds.

       In its report, UOB Kay Hian notes that current ASPs have declined 3.8% month-on-month.

       “ASPs could remain above pre-pandemic levels given that input costs such as natural gas, labour and logistics are considerably higher.

       “However, in terms of margins, we expect it to potentially find a bottom in the second quarter or in the third quarter of this year, with margins possibly dipping below pre-pandemic levels.

       “Buyers appear to be replenishing inventory now that ASPs are closer to the pre-pandemic range. A pick-up of utilisation rates towards 80%-90% followed by resumption of capacity expansion should signal the bottom for the industry. Sentiment is unlikely to improve until a bottom is found,” it adds.

       The research house notes that in terms of existing sector valuations, it is at 16.9 times now, suggesting that there remains downside, as it is above the five-year price-to-earnings (PE) mean of 15.4 times.

       “The average has been distorted with a downward bias over the past two years with glove companies trading at three to four times PE.

       “However, we believe pre-pandemic valuations are more reflective of sentiment and volatility of the glove sector, since the pandemic and its effects on the sector are a black swan.

       If sector valuations were to be compared to pre-pandemic conditions, 16.9 times PE is below the minus two standard deviation or SD of its five-year mean of 17.7 times.”

       “Hence, we upgrade the sector to a “market weight” from “underweight” and advocate for investors to accumulate on potential upcoming weakness,” it says.

       Largest glove manufacturer in the world Top Glove Corp Bhd, seen as a benchmark of sorts for its peers, recently reported a fall in its net profit for the second quarter ended Feb 28, 2022, with earnings coming in at RM87.55mil, against the RM2.87bil it made a year earlier, largely because of lower ASPs.

       “Raw material prices were generally on a downward trend, decreasing at a slower pace than ASPs, which resulted in margin compression.

       “The group also had to contend with increases in other operating costs including utilities, manpower and chemical costs; as well as intensifying competition, with the new glove supply causing pricing pressure in light of the successful Covid 19 vaccine rollout globally,” the company said in a released statement.