The number of analysts recommending
KUALA LUMPUR: Top Glove Corp Bhd
is Kenanga Investment Bank's Research’s top pick among the glove players the research house covers as it is trading at an average 15% discount to its peers.
Overall, the brokerage has an “overweight” rating on the sector as it opined that glove makers are poised for a re-rating as they have evolved successfully.
Among others, they have implemented automation, which could help them improve margins, good product mix and are expected to report peak quarterly earnings.
Kenanga Research said the average 8% to 10% growth in annual demand for rubber gloves over the next few years was intact.
The demand and strong double-digit growth rate of gloves are expected to continue to be driven by nitrile gloves.
“We also expect latex-based gloves to continue to register positive volume sales as well due to the stable latex price. Growth will be supported by higher health standards and expanding use of rubber gloves.”
Meanwhile, the Malaysian Rubber Glove Manufacturers Association anticipated a 20% export growth in rubber gloves, which is largely on track with volume growth recorded by the rubber glove stocks Kenanga Research tracks in the first and second quarter.
“Based on our channel checks, glove players under our coverage are facing longer delivery lead times (the duration order is placed and delivered) has risen to an average of between 50 to 60 days as compared to 40 to 50 days (nine months ago) implying robust demand.”
On why it chooses Top Glove as its top pick, Kenanga Research said: “The valuation gap should narrow when we consider that Top Glove has similar or higher total capacity and net profit level compared to Kossan Rubber Industries Bhd and Hartalega Holdings Bhd.”
It likes Top Glove for its ability to evolve from purely a dominant latex-based rubber gloves producer into a higher margin nitrile based product, undemanding valuation and solid management.
“The stronger-than-expected volume growth and the 6% quarter-on-quarter weakening of the ringgit against the US dollar are pointing towards a superb set of full-year results for Top Glove, due in mid-October.
“Our implied target price-earnings ratio of 20 times for Top Glove is still below its peak earnings’ valuation averaging between 23 times to 26 times.”
Both Kossan and Top Glove announced their best quarterly earnings since 2001.
Kenanga Research likes Kossan because of its superior net profit growth, rapid capacity expansion over the next two years, gradual increase in its dividend payout ratio and its technical rubber product division, which is growing rapidly.
It also likes Hartalega for its highly automated production processes model, solid improvement in its production processes and reduction in costs, innovation in producing superior quality nitrile gloves and positioning in a booming nitrile segment with a dominant market position.
It is maintaining its “outperform” calls on all three companies.
It pegs a target price of RM9.16 to Top Glove based on 20 times FY16 earnings per share (EPS).
Meanwhile, Kossan’s target price is RM8.16 based on 22 times FY16 EPS and Hartalega’s target price is RM5.30 based on 27 times fully diluted 2016 EPS.
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