THE recent rally in the FBM KLCI index has been driven by the shares of the big glove companies, namely Top Glove Bhd and Hartalega Holdings Bhd.
Top Glove’s market capitalisation stands at RM59bil while Hartalega is at RM57.8bil.
What is also noteworthy is that over the last one month, the trading of both Top Glove and Hartalega shares have made up more than half of the daily traded value of the component stocks of the FBM KLCI, which constitutes the 30 biggest companies on Bursa Malaysia.
There were also days when both Top Glove and Hartalega shares made up a staggering 70% of daily trade value.
However, some say this trend does pose a risk.
One analyst explains it this way – if and when the pandemic dies down, rubber glove stocks may lose some of their value. Shrinkage in their market capitalisations could then put a dampener on the FBM KLCI.
The glove manufacturing sector is cyclical in nature.
Former investment banker Ian Yoong says that at the moment the demand for rubber gloves is currently strong because of the Covid-19 pandemic.
“Investors should be very cautious when investing in the hottest sector, which is currently the rubber glove sector, ” Yoong tells StarBizWeek.
He points out that eventually demand for gloves will reach a plateau and decline as the number of infections slow down.
At the same time manufacturing capacity will increase exponentially.
“This will lead to an oversupply situation and eventually a glut in the sector, and profits will then fall.”
“Buying of rubber glove makers’ shares will taper off when there are expectations of lower earnings; shareholders will sell their holdings. Share prices will then come off from their dizzying highs, ” Yoong says.
The rubber glove counters have been on the top volume list over the last few months. These companies are reaping high profit margins due to a surge in the average selling prices of their products amidst increasing numbers of infections of the Covid-19 pandemic worldwide.
Meanwhile, a combination of Top Glove, Hartalega, Supermax Corp Bhd and Kossan Rubber Industries Bhd have contributed a significant proportion of the total trading value of the entire Bursa Malaysia market, hitting one third recently.
About RM1.7bil of glove shares traded on Monday, which is about 34% of the total traded value of RM5.07bil on Bursa, Bloomberg data shows.
On average, over the last one month, the four main glove manufacturers made up almost 22% of the daily traded value of Bursa.
According to UOB Kay Hian Research, Supermax has the potential to make an entry into the FBM KLCI’s 30 companies index, to join Top Glove and Hartalega.
“Our blue sky scenario entails Supermax potentially trading at 21.3 times of its five-year mean upon a potential entry to the FBM KLCI. It implies a target price of RM17.60.
“Once earnings normalise, we believe Supermax should re-rate and narrow its valuation discount to sizeable local peers’ due to its downstream value creation, aggressive expansion ambitions, consistent execution, and potential inclusion in the FBM KLCI, ” the research house says in a recent report.
Yesterday, Supermax closed at its all-time high of RM13.62 which gave it a market capitalisation of RM18.5bil.
According to MIDF Research, glove makers are now working to expand their production capacity to meet the high demand.
It says production capacity of Top Glove is expected to grow by 36% from 73.8 billion pieces in the third quarter of this year to 100.4 billion pieces in the fourth quarter.
Meanwhile, Hartalega will continue with its capacity expansion plan whereby annual installed capacity is expected to increase from the current 38.1 billion to 43.7 billion pieces by 2022.
MIDF says Kossan Rubber is commissioning 10 new production lines.
Kossan Rubber had recently announced that it had acquired industrial property in Kapar, Selangor for expanding its manufacturing capacity.
Meanwhile, Supermax is expanding its production capacity with three plants under construction that will increase the company’s capacity by almost 50% from 26.18 billion gloves to 38.18 billion by 2022.
The massive expansion would see Supermax becoming the third-largest glove producer in Malaysia surpassing Kossan.
MIDF points out though that the positive news of the glove industry has already been priced in following the rally in rubber glove stocks.
“We maintain a neutral call on the glove sector. Overall, we expect earnings outlook for glove makers to remain positive in the second half due to the continuous upward revision in gloves’ average selling prices (ASPs) and favourable foreign exchange rates and raw material prices.
“We think the tight supply situation in the glove industry would continue in the medium term, ” it says.
According to the Malaysia Rubber Glove Manufacturer Association (Margma), the ASPs of nitrile gloves currently range between US$100 and US$120 per 1,000 pieces, which is a huge increase compared to US$25 last year.
Margma president Denis Low points out that there are shortages of medical gloves in the market and that manufacturers’ current capacity are fully booked until January to June next year.
“Demand outweighs supply. Presently, there is a chronic shortage of gloves worldwide, ” he tells StarBizWeek.
The glove counters are likely to continue their momentum as long as the pandemic continues and glove shortages persist.
But what would happen when the pandemic is stemmed, either through the creation of vaccines or through aggressive lockdowns. If that happens and the glove stocks lose their lustre, will the FBM KLCI take a beating then? However, other replacement component stocks could help buffer the FBM KLCI then, on the strength of an economic recovery bet.
Did you find this article insightful?
92% readers found this article insightful