KUALA LUMPUR: Affin Hwang Capital Research has downgraded the glove makers to Neutral with Top Glove as its sector top pick as the current sector forward price-to-earnings (P/E) valuation was no longer attractive.
The research house said on Thursday all glove companies within its coverage reported better 2Q17/1H17 results on-year while margins rebounded sequentially as industry demand-supply dynamics improved.
“Moving forward, we believe that automation and cost pass-through will be essential to protect margins while capacity expansion remains the key growth driver.
Affin Hwang Research said the sector valuation has risen by 12.5% year-to-date. The current sector forward P/E valuation of 19.2 times has priced in the better prospects ahead and is no longer attractive.
For the latest 2QCY17 quarterly results, all the glove companies within its coverage reported better results compared to the same quarter in the preceding year. But, most missed expectations due to various reasons.
The industry witnessed stiffer pricing competition in 2016 due to increased supply. However, after a relatively modest increase in industry capacity since 2H16 and robust global glove demand, the industry demand-supply dynamics has improved, as evidenced by rebounding industry profit margins.
The factors for firmer demands were due to more stringent healthcare regulations, increased healthcare spending, growing usage in emerging countries and widening application of gloves in other industries.
“Moving forward, we expect the glove manufacturers to contend with rising raw material, labour and utility costs.
“Meanwhile, a stronger Ringgit could reduce the effective sales proceeds received. However, we expect increased industry automation and the ability to pass through the costs to their customers to help mitigate these factors and protect profit margins,” it said.
“We believe the ability to execute the capacity expansion plans without sacrificing profit margins would be the key differentiating factor among the glove companies within our coverage.
“We remain lukewarm on certain companies’ diversification plans and do not expect these ventures to be a game-changer,” said Affin Hwang Research.