CGS-CIMB Research retains overweight call on glove makers


  • Analyst Reports
  • Sunday, 13 Sep 2020

In term of ASPs, glove makers are expecting further hikes up to at least 1QCY21F. This is on the basis of the recent increase in raw material prices as well as the acute global shortage of gloves.

KUALA LUMPUR: CGS-CIMB Equities Research reiterates its Overweight call on the glove sector as concerns of potential declines in average selling prices (ASPs) from CY21F onwards are premature at this juncture.

The research house said signs are showing that ASPs may stay elevated for a longer period (up to end-CY21F).

“Despite its bright prospects, the Malaysian glove sector is trading attractively at 16.7 times CY21F P/E, a 24.3% discount to its five-year mean P/E of 22.1 times.

“In our view, this has largely priced in concerns of a potential windfall tax and discovery of a Covid-19 vaccine, ” it said.

Commenting on the order visibility of glove makers, the research house expected it to be robust up to at least end-1HCY21F, a testament to the current strong global glove demand.

“In our view, the acute global shortage of gloves is likely to worsen as Covid-19 cases worldwide show no signs of slowing down.

“Note that many developed markets (with high glove usage per capita), such as the US and UK, have continued to record new highs in daily Covid-19 cases, ” it said.

CGS-CIMB Research expects the situation to worsen as more western countries head towards the wintering period in 4Q20, which could lead to further spikes in Covid-19 cases.

In term of ASPs, glove makers are expecting further hikes up to at least 1QCY21F. This is on the basis of the recent increase in raw material prices as well as the acute global shortage of gloves.

“Based on our estimates, glove ASPs could rise by 10%-45% quarter-on-quarter in 4QCY20F to US$50-US$100 per 1,000 pieces, which is above our current forecasts.

“However, we gather that certain glove buyers are willing to offer fixed ASPs (at a substantial premium to current ASPs) with a minimum one-year contract tenure to secure glove supply.

“In our view, this should provide certainties of ASPs for CY21F if glove makers agree to these contracts, ” it said.

On the potential windfall tax, glove makers and Malaysia Rubber Glove Manufacturer Association (MARGMA) indicate that there has been no engagement with the government on this matter.

CGS-CIMB Research said in its view, the implementation of a windfall tax on the glove sector would have long-term negative implication as this will drive glove makers to countries with more conducive environments (e.g. labour, tax incentives, utilities, etc).

Glove stocks have been sold down with the recent newsflow on Covid-19 vaccine development.

However, it thinks the eradication of the virus may take a while longer, given that: i) no Covid-19 vaccine candidates have passed Stage 3 and 4 of clinical trials, ii) current limited production capacity may hamper mass availability, and iii) potential mutations of the virus.

Also, it believes that glove demand is unlikely to taper off even with a vaccine, as glove use will in fact increase when masses rush to be vaccinated.

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