Local players within the rubber industry are likely to remain profitable albeit with various headwinds that are causing global uncertainties.
In a report, RHB Research said the first quarter of 2025 (1Q25) could possibly be the worst quarter of all for the industry, evident by industry players’ guidance for a much weaker quarter in sales volume.
According to the research house, this fact coincided with the threat of losing the European Union (EU) market share as China continues to turn to non-US markets, further jeopardising local players’ profitability.
“However, employee rightsizing and the easing of raw material costs that began in March will allow glove companies to post stronger results in 2Q25 after the inventory-destocking cycle,” it said.
The price of natural latex had last traded at US$1.54 per kg in March 2025, compared to the average price of US%1.56 per kg in February of the same year.
“Moving forward, natural latex price is expected to normalise post winter season in Thailand as it is a major latex producing country. Nonetheless, prices could remain elevated due to unpredictable weather patterns, ageing rubber plantations and significant deficit of skilled tappers,” the research house explained.
Another positive factor to boost the industry is the enquiries from clients that have picked up for the month of May.
RHB Research said this indicated that the inventory adjustment period is coming to an end as the period of excessive orders by US-based customers in 2024 only lasted for six months based on an analysis.
“The like-for-like inventory adjustment which took place from the second half of 2022 until the first half of 2024 was a result of excessive buying from 2Q20 until 1Q22 due to the Covid-19 pandemic. We see a positive correlation between the period of excessive purchase and the period required to exhaust inventory,” it said.
In line with that, RHB Research holds its basis of inventory restocking to take place by the second half of this year, which should have a positive earnings impact on Malaysian glove makers.
As for US tariffs, the research house said, Malaysia’s glove products which are widely exported to the United States could be subjected to reciprocal tariffs.
“While things remain fluid at this juncture, we are of the view that the consequences could be far-reaching, affecting not only the glove manufacturing sector but also the broader healthcare industry in the United States that relies on these products,” it noted.
However, RHB Research said it will upgrade the sector to “overweight” from “neutral” based on its compelling valuation and inventory restocking initiatives that are set to take place by the second half of this year (2H25).
It added its “neutral” call was played out after a sector-wide share price correction of 30% to 40% in 1Q25 since its previous downgrade. The sector is currently trading at a forward price-to-book-ratio (P/BV) of 1.2 times, below its three-year historical mean of 1.3 times.
RHB Research said it deemed the valuation as attractive as this level is even lower than the sector’s average P/BV in 1H24, where the sector was struggling during an inventory adjustment period.
“We advocate investors to accumulate at this level as we think downside risks could be limited due to a net favourable switch in geographical exposure which are net earnings positive in our view; and the sector profitability poised to recover post one-off inventory adjustment cycle,” it said.
Source: thestar