PETALING JAYA: Amid the unabated concerns over the Covid-19 outbreak, major glovemakers have revised upwards their average selling price (ASP) guidance for the next two months.
However, industry spot sales ASPs remain unchanged at two to three times contract ASPs, UOB Kay Hian Research (UOBKH) noted.
“With the higher revisions and spot sales mix, we expect 2020 industry blended ASP to increase by 69% year-on-year (y-o-y) (versus 23% y-o-y previously), ” the brokerage said.
“Order visibility as reflected by delivery lead time is further extended to 540 days (from 300 days in June). Contracted capacity for the second half of 2021 is almost secured. This suggests new orders being placed may only be received in 2022, ” it added.
In its research note yesterday, UOBKH pointed out that the likes of Top Glove Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd (Big-3) have revised upwards their ASP guidance for the months of August and September. It noted that Top Glove, in particular, had raised its spot sales mix to 20%-30% from 10%-15% previously.
Kossan, on the other hand, had accelerated its capacity addition for 2021 to 35.4 billion pieces per annum, up 10.4% y-o-y.
“Apart from that, Kossan and Supermax Corp Bhd appear to be on track to be included in the FBM KLCI as a component stock during the November 2020 review. The MSCI review in August is likely to see higher weightage for glove manufacturers as well, ” UOBKH said.Meanwhile, the brokerage noted that while the discovery of a preventive vaccine against Covid-19 could dent investor sentiment towards glovemakers, such a development would unlikely have an immediate impact on glove demand and subsequently the ASPs.
It added that a kneejerk selling in glove stocks could represent an opportune entry for for investors.
UOBKH has maintained an overweight stance on the glove sector, with Top Glove as its top sector pick.
“We like it for its increasing allocation to spot sales mix coupled with above-industry expansion growth. We also like Kossan as the company, a laggard, is playing catch-up with its peers in its ASP pricing, and has unveiled plans to accelerate capacity expansion, and is on track to being included in the FBM KLCI as a constituent stock, ” it explained.
It has maintained a hold call for Hartalega, with a target price of RM19.50. Its target price for Top Glove stood at RM36.90 and for Kossan it was RM19.40.“Our normalised valuations based on 2022 suggest there is support to existing valuations. Hence, the reward-to-risk trade-off still appears attractive to us at this juncture, ” UOBKH said.
Factoring in the recent ASP guidance, higher spot sales mix and accelerated capacity addition, UOBKH said it expects peak earnings to grow 850% against 2019. In addition, it noted its earnings estimated for the sector are 80% above consensus estimates, leaving ample positive surprises over the few quarters ahead.
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