Rubber glove manufacturers to benefit from Covid-19 and weaker ringgit

  • Analyst Reports
  • Thursday, 05 Mar 2020

KUALA LUMPUR: Despite overall sector performance falling below market expectations, the Malaysian rubber glove sector could experience a stronger 2020 performance on the back of stronger demand arising from Covid-19 and a weaker ringgit against the US dollar.

Affin Hwang Capital research remains overweight on the sector and increased its earnings forecasts for 2020 by 2% to 3% as it expects stronger earnings growth in the first half of the year due to the Covid-19 outbreak.

"Our channel checks indicate that the lead time for delivery has increased from the average 30-45 days in early January 2020 to more than 60 days recently (some have guided that their lead time is now at 4 months," it said.

It added that most manufacturers are already operating at above 85% utilisation rate and should have the flexibility to increase selling prices, hence boosting margins.

Top Glove and Kossan Rubber Industries are the research house's top buy calls in the sector.

With regards to expansion, Affin Hwang expects the rubber glove manufacturers to act rationally as the current demand surge may not be sustainable with a significant increase in capacity possibly leading to an overcapacity situation in subsequent years.

"Historically, in years where there is a surge in demand due to a pandemic, a slowdown is expected in the subsequent year, as inventories are worn down," it said.

Manufacturers are adhering to current expansion plans with total capacity by the Big 4 companies expected to increase 11% to 12% in 2020, said Affin Hwang.

To recap, earnings for the rubber glove sector in 2019 fell short of street forecasts at 92%, although it met Affin HWang's estimate at 94%.

Affin Hwang believes that sector earnings, which grew 1.3% year-on-year were negatively impacted by both a labour shortage and also weaker demand from the US for the first nine months of 2019.

However, strong demand growth of 19.5% quarter-on-quarter in 4Q19 suggested that demand from the US had returned as buying patterns started to normalise since import tariffs were imposed on China gloves in 3Q19.
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