MIDF Research said Supermax and Kossan’s market capitalisation have stayed above the RM20bil mark. Trading volume has also improved, 60-day average for Kossan is 17.06 million, and 51.5 million for Supermax, indicating decent liquidity.
“As such, they are likely to be included as the KLCI component stocks in the upcoming FTSE review in December.
“If and should the two stocks are included, the weightage of glove counters on the KLCI may possibly increase to 30% to 40% from 15% currently based on the latest market caps of the top four glove companies listed on Bursa, ” it said.
MIDF Research said based on channel checks, supply for medical gloves remains tight and average selling prices (ASPs) are still in an upward trajectory after the jump seen earlier in the first half of the year.
Ex-factory prices are expected to grow by 30% to 40% in 3QCY20 compared to 2QCY20. Following that, there may be another increase of 40% to 50% in 4QCY20.
“As such, the glove makers are likely to beat their own records seen in the last quarter in the upcoming two quarters, ” it said.
MIDF Research pointed out demand and ASPs likely to remain elevated in 2021. The number of new Covid-19 cases has surpassed 400,000 globally even before the Northern Hemisphere enters winter.
The surge in number of cases globally means that the curve has not been flattened. This occurs as most economies reopened from strict lockdowns.
The number of new daily cases may continue to remain high as economies cannot afford another round of total lockdown. In order to curb further spreading, mass testing is expected to continue and that will increase the use of medical gloves.
“Gloves will also be used as a protective and preventive gear. We expect that ASPs are likely to remain high in FY21 based on a base-case scenario of vaccine availability in mid-2021. The administration of vaccines will also require the usage of gloves.
“Chances of ASPs rebalancing in 2022 but demand should remain sturdy. We believe that demand for gloves to remain high into 2022 due to the organic growth of the industry, coupled to higher hygiene awareness.
“Since the pandemic, the demand for rubber gloves is expected to grow at a pace of over 20% from about 10% previously. Topping that, wider adoption of glove usages from industries, government agencies as well as services industry such as beauty and grooming.
“The growth in demand is due to the change in hygiene habits as well as an expected increase in gloves used per capita among the developing nations, ” it said.
MIDF Research said some manufacturers are seeing lead time increasing to more than 400 days compared to 30 days to 40 days previously.
The long waiting time also implies that demand for rubber gloves remain strong. As the current supply is for immediate usage, industry players expect another 6 to 8 months for their customers to build up their inventory, which may imply that supply deficit may last for two years.
It added that as such, ASP is likely to remain high and unlikely to revert to pre-pandemic level at least in the next two years.
In the last quarter, operating cash flow for the glove companies under our coverage has grown by 3 to 6 times year-on-year. The companies are also in net cash position now.
This have also reduced finance costs for the glove companies and with the additional cash in hand, they are able to speed up their expansion plans or to bring forward some of the future production capacity that they have already planned for even before the pandemic starts.
“In addition, the companies under our coverage have been paying at least 30% of their profits. Based on our estimates, dividend yield for Top Glove is 5.1%/2.3% for FY21F/FY22F.
“Meanwhile, dividend yield expected for Hartalega is 2.1%/1.9% for FY21F/FY22F, Kossan is 2.2%/1.4% FY21F/FY22F, Supermax 3.1%/3.0%.
“We opine that the dividend yields are considerably decent in the low interest rate environment and the strong cashflow can help the companies fulfil their dividend policies with ease. Furthermore, any potential special dividends may further boost the appeal of the estimated dividend yield, ” MIDF Research said.
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