Top Glove, Hartalega, Kossan slump as UOB Kay Hian underweights sector

The lower profits were mainly due to the sharp strengthening of the ringgit in a short timeframe.

KUALA LUMPUR: Shares of glove makers Top Glove Corp , Hartalega Holdings and Kossan Rubber fell at the midday break on Wednesday due to recent factors including their fragile lofty valuations, as UOB Kay Hian Malaysia Research maintained its underweight for the sector.

At midday, Top Glove was down nine sen to RM4.89 – falling for eight straight days while Hartalega lost five sen to RM5.10 and Kossan three sen to RM3.85. However, Supermax inched up one sen to RM1.65.

The FBM KLCI rose 7.10 points or 0.42% to 1,679.86. Turnover was 1.78 billion shares valued at RM1.14bil. There were 585 gainers, 221 losers and 286 counters unchanged.

UOB Kay Hian Research said the rubber glove sector, which includes Hartalega, Kossan, Top Glove and Supermax, had on average lost 10% over Monday to Tuesday.

“The sudden selldown is rather disconcerting given Hartalega and Top Glove are KLCI index components as well,” it said.

The research house said while it thinks the selldown is unjustified based on well-known factors, the selldown resonates with our sentiment over a possible derailing of fragile lofty valuations over negative developments. 

Risk-reward profile is skewed towards the downside with valuations stretched, with the sector trading beyond +two standard deviations of its five-year forward mean price-to-earnings (PE).

“We believe this was sparked by three factors that developed over the weekend, leading us to believe it may have been unjustified but serves as a reminder of downside risk to lofty valuations.

“Expectations of a weakening US$ lent to the recent weakness. Our calculations show that every 1% depreciation of the ringgit vs the US dollar could beef up glove makers’ earnings by 6% (this analysis excludes the shared cost savings mechanism with customers which will consequently moderate any significant gain in profit margins). 

“Therefore, based on the current exchange rate, there may be some downside to our earnings estimates given that our forex assumption is based on an average of RM4.23/US$ over the next one to two years,”  it said.

UOB Kay Hian Research said further worker rights abuse allegations arose over the weekend. Australian firm, Ansell, was said to be investigating abuse allegations from its Malaysian suppliers. 

This is a recurring theme, which initially arose in mid-November 2018. However, it was well addressed by Malaysia Human Resource Minister, M. Kulasegaran, who reiterated confidence in Top Glove's operations’ adherence to the relevant laws. 

The news comes on the back of the Human Resource Ministry’s visit to 22 of Top Glove’s 35 domestic factories over the weekend.

“Surfacing guidance from rubber glove companies on supply-demand imbalance. This has been well factored in by the market, seeing that rubber glove companies have been guiding on their capacity outlooks for the next two years in detail. 

“While the first signs of slowing demand emerged in 3Q18, there seems to be a disconnect between the supply-demand imbalance and the recent selldown,” UOB Kay Hian Research said.