AmInvest Research retains neutral on glove sector

AmInvest Research said beyond the pandemic, it anticipates a structural change in the way gloves are used, forming a new normal where glove usage per capita will rise as hygiene measures become stricter.

KUALA LUMPUR: AmInvestment Research is maintaining its Neutral view on the glove sector as valuations for Top Glove, Kossan and Hartalega under its coverage are already fully reflected in the companies’ earnings outlook.

In its research note issued on Wednesday, it reckoned the average selling prices (ASP) will begin to ease after 1H2021 following the strong increase over the past nine months, and are already priced in.

“Moreover, we are cutting our target price-to-earnings ratio (PER) by 10% across the board to take into account the risk of a down cycle in the sector as a result of successful rollouts of Covid-19 vaccines.

“While we believe that glove makers’ fundamentals remain steady for the next few years, they offer limited upside at their current share prices. Hence, we advise investors to accumulate at lower levels, ” it said.

The Malaysian Rubber Glove Manufacturers Association (Margma) expects demand for gloves to remain positive post-Covid-19.

The main reason is the pandemic has raised much awareness on personal hygiene, thus resulting in a higher usage of gloves.

In developing countries, the usage of gloves is increasing with a wider adoption of gloves usage from non-medical industries such as F&B, services, retail etc.

AmInvest Research said beyond the pandemic, it anticipates a structural change in the way gloves are used, forming a new normal where glove usage per capita will rise as hygiene measures become stricter.

This is expected to apply not only in the healthcare sector but also across different industries like F&B.

The glove consumption per capita in emerging markets such as India and China is still low at around two to six gloves as opposed to about 100 to 280 gloves for developed countries.

Glove companies will continue their expansion plan, adding about 120 billion (+55%) pieces per annum by the end of 2022.

For Malaysian companies, Top Glove and Supermax will see the biggest expansion as they add 30bil and 22 billion pieces respectively, followed by Hartalega (12 billion pieces) and Kossan (10billion pieces).

The rest of the additional capacity will be from Sri Trang (Thailand), Intco Medical and Blue Sail (both China), totalling about 56 billion pieces per annum.

Although AmIvest Research holds the view that demand for gloves will remain stable post-Covid-19, it expects ASP to decline as there is no longer a rush for gloves compared to what happened at the beginning of the pandemic.

“Nonetheless, we expect ASP will stabilise at a higher level than the pre-pandemic level due to the broader usage of gloves. Moreover, capacity expansion from glove companies will be able to cope with the future demand.

“Rubber prices have been increasing over the past 12 months as protective glove demand surges due to Covid-19. At the same time, the price of butadiene, which is the key ingredient to produce nitrile, has also been on the rising trend over the past six months.

“Nonetheless, we believe glove makers will be able to pass on the price increase to buyers, thus keeping their margins safe, ” it said.

It kept its Hold call on Top Glove with a fair value (FV) of RM6.50 per share. It forecasts Top Glove’s net profit at RM2.9bil, RM2.7bil and RM1.5bil for FY21 to FY23 respectively.

Its ASP assumptions for FY21 to 23 are US$82/1,000 pcs, US$30/1,000 pcs and US$25/1,000 pcs respectively. The FV of RM6.50 is based on CY22 EPS over a PER of 23 times.

The research house also maintained its Hold call on Hartalega with a FV of RM12.25 per share.

“We expect Hartalega to register net earnings of RM2,1bil, RM1.3bil and RM1.1bil for FY21 to FY23 respectively, ” it said.

Its ASP assumptions for FY21 to FY23 are US$40/1,000 pcs, US$33/1,000 pcs and US$32/1,000 pcs. Its FV of RM12.25 per share is based on its five-year average PER of 35 times over CY22EPS.

AmInvest Research also maintained its Hold call on Kossan with a FV of RM4.80 per share.

It forecasts net earnings of RM903.8mil, RM1.4bil and RM511.3mil for FY20 to FY22 respectively based on ASP assumptions of US$31/1,000pcs, US$40/1,000 pcs and US$29/1,000 pcs.

Its FV of RM4.80 per share is based on its five-year average PER of 24 times over FY22 EPS.

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