KUALA LUMPUR: CGS-CIMB Equities Research is retaining its overweight outlook on glove makers with Kossan and Top Glove as top picks.
The World Health Organisation (WHO) confirmed a new virus outbreak in Wuhan, China which is a strain of coronavirus.
“In the long term, we believe that this virus outbreak will lead to higher healthcare awareness especially in emerging countries, and in turn boost glove demand, ” it said in a research note on Tuesday.
CGS-CIMB Research expects the sector’s earnings prospects to improve, supported by better supply-demand dynamics in the sector. Our top picks are Kossan (Add, TP: RM5.21) and Top Glove (Add, TP: RM5.22).
“We view both stocks as laggard plays vs. their peers, including Hartalega (Hold, TP: RM6.26), as we expect the valuation gap to narrow. Downside risks are stiffer-than-expected pricing competition and higher operating expenses, ” it said.
To recap, news reports confirmed a new virus outbreak in Wuhan which is a strain of coronavirus. According to the BBC, coronaviruses are a broad family of viruses.
The research house pointed out the severe acute respiratory syndrome (SARS) is also a type of coronavirus that killed 774 of the 8,098 people infected in an outbreak that started in Guangdong, China in 2002.
There are more than 200 confirmed coronoavirus cases, including three deaths reported thus far. This new coronavirus strain has already spread to other countries with two cases in Thailand, one in Japan and one in South Korea.
“Based on our channel checks, glove makers under our coverage has yet to witness a surge in demand for gloves owing to this virus outbreak. We attribute this to the fact that this outbreak is very recent while China does not have high glove usage per capita due to lower healthcare awareness vs. developed countries.
“In our view, glove makers will only see a sharp rise in global glove demand if this outbreak is prolonged and turns into a global pandemic. We witnessed this during the SARS outbreak in 2003 and avian flu in 2009. We estimate that global glove demand rose 12%-16% in 2003 and 2009 (vs. 7-9% p.a. in 2009-19), ” it said.
CGS-CIMB Research said as glove makers are running at a high average utilisation rate (more than 85%), any surge in demand for rubber gloves should lead to margin expansion for glove makers given their limited capacity.
“We believe that Supermax and Top Glove could be the biggest beneficiaries as both have excess capacity especially in the latex segment (due to more pricing pressure in this segment).
“In the long term, we believe that this virus outbreak will lead to higher healthcare awareness especially in emerging countries, and in turn boost glove demand, ” it said.
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