Glove makers among those impacted by firmer ringgit
KUALA LUMPUR: UOB Kay Hian Malaysia Research advises investors to take profit on the rubber gloves sector as it has had a good run and it is time to lock in profits.
It said on Monday downside risks are burgeoning and there is no leeway for letdowns and downgraded the sector call to Underweight from Market Weight.
“We are also turning bearish on the back of rising concerns over unsustainable premium valuations (+ two standard deviation above five-year forward mean price-to-earnings). Hence, the crowding into this space is a good opportunity to sell on strength,” it said.
UOB Kay Hian Research pointed out as the share prices of major rubber glove players have made new highs, it believes the market is fundamentally underpricing risks such as strong currency headwinds that may eat up profits (sharp US dollar depreciation in previous cycle led to earnings contraction of 15%-30% on-quarter.
Another factor is the potential supply recovery in the Chinese vinyl glove space, and c) unprecedented sales volume, which could unwind on possible inventory build-ups.
“While these new share price highs were inspired by a combination of overhyped optimism and hope of the current scarcity situation lengthening into the future, we are turning bearish on the glove sector. This is premised mainly on the back of mounting concerns over unsustainable premium valuations,” it said.
It downgraded Top Glove to sell with an unchanged target price of RM8 based on 18 times 2019F PE. It is the second best performing glove stock under its coverage.
“Now, we reckon valuations have run ahead of fundamentals and we advocate to take profit.
“Although Top Glove is looking at more inorganic growth opportunities, future M&A initiatives should be smallish seeing that the acquisition of Aspion would have already stretched net gearing to 0.6 times,” it said.
As for Hartalega
, the research house reiterated its Sell with an unchanged target price of RM8.04 based on 24 times 2019F PE.
“The highly-anticipated new anti-microbial gloves (AMG) may face some competition, no thanks to Unigloves and BioCote, as they have both collaborated to launch Fortified (a similar functional product to AMG) in Europe earlier this month. Hence, we believe Hartalega has somewhat missed the first-mover advantage in this region,” it said.
UOB Kay Hian Research also downgraded Kossan to Sell with an unchanged target price of RM7.18 based on 18 times 2019F PE.
Despite being a laggard in the glove manufacturing space, the stock still gave investors a handsome capital return of 50% over the past nine months.
“Similar to Top Glove, we recommend taking some chips off the table primarily on valuation grounds. We believe upside is limited from current share price level given the lack of fresh catalysts,” it said.
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