HLIB Research retains overweight on glove makers

Vaccination demand for gloves to more than offset the decline from testing demand.

KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research is retaining its overweight stance on glove makers as it sees demand and average selling prices (ASPs) will be driven by testing frequency and vaccine rollout using gloves.

In its research note on Tuesday, it said for the remainder of CY21, it expects vaccination demand for gloves to more than offset the decline from testing demand.

“Even with global supply expected to rise by 20%, we expect there to be a supply shortage of circa 12.4 billion pieces in CY21. Based on our new valuation methodology, our top pick Top Glove’s TP is lowered from RM10.54 to RM8.06. Maintain Buy, ” it said.

HLIB Research said with global vaccine roll out only just beginning to take shape, it expects glove ASPs to remain elevated (at around US$115 to US$140 per thousand pieces) for the time being, with a possible decline in 4QCY21 at the earliest.

The US expects to reach herd immunity by 4Q21 and full vaccinations by 1Q22. However, with vaccinations happening more rapidly in affluent Western countries than the rest of the globe, current estimates indicate global herd immunity could take as long as five years.

This would provide support for glove demand in the medium term. Second strain and anti-vax wildcard could potentially wreak havoc.

While it is still unknown how the second strain variants affect existing vaccines, there is a possibility that existing vaccines prove ineffective against newer variants.

According to a recent study, the Oxford/AstraZeneca Covid-19 vaccine does not appear to offer protection against a mild viral variant first identified in South Africa.

With regard to anti-vax movement, from the latest reading, if all US citizens that say they would not take the vaccine (31%) do not get vaccinated, the US would not be able to achieve herd immunity. These two factors have the potential to prolong the Covid-19 pandemic.

“We switch our valuation methodology from straight price-to-earnings (PE) multiple to a modified discounted cashflow (DCF) valuation.

“We value the glove companies using with their pre-pandemic five-year average PE multiple of (CY15-19) based on sustainable earnings in a post-super normal earnings environment summed with free cash flows (both discounted back to PV) generated during the boom period.

“This encompasses earnings in a post-pandemic era as well as high profits generated during the pandemic. We rejig our forecasts as we expect high ASPs to sustain until 4QCY21. Maintain overweight.

“Despite share prices correcting downwards, we do not expect vaccine roll out to be as straight forward as the market suggests as logistical, procurement, anti-vax movement and second strain issues could derail efforts and thus provide support for glove demand. Based on our new valuation methodology, our top pick Top Glove’s TP is lowered from RM10.54 to RM8.06 (maintain buy), ” it said.

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HLIB Research , gloves , Top Glove , vaccine


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