By SHAZNI ONG / Pic By MUHD AMIN NAHARUL
STOCKS of glove makers are on a roll again after the World Health Organisation (WHO) declared Covid-19 a pandemic, sending investors into healthcare-linked stocks.
The Bursa Healthcare Index, which includes the rubber glove makers, was the only index that rose at yesterday’s closing, rising 0.15% or 1.96 points higher at 1,349.95 points.
Two of the 13 constituents of the index also led the gainers yesterday on the benchmark FTSE Bursa Malaysia KLCI which sank 1.7% or 24.40 points to 1,419.43 points.
Top Glove Corp Bhd advanced 3.7% or 23 sen to close at RM6.51, while Hartalega Holdings Bhd rose 1.4% or nine sen to RM6.57.
Rubber glove producers are experiencing higher demand from abroad due to the Covid-19 pandemic, Affin Hwang Investment Bank Bhd (Affin Hwang Capital) analyst Ng Chi Hoong said.
“Delivery lead time has increased from 30 days to 45 days from early January to more than 60 days currently (some even mentioned there is a four-month wait).
“Given most manufacturers are already operating at utilisation rates of around 90%, we believe the average selling price will be higher,” he told The Malaysian Reserve yesterday.
Following the WHO’s move to label the virus as a pandemic, certain countries which are not affected by Covid-19 might also start stocking up inventory for medical usage, thus pushing demand higher.
“Our numbers have factored in higher demand for February to April 2020 due to Covid-19. There could be more upside if the situation worsens or prolonged,” Ng said.
Affin Hwang Capital has an ‘Overweight’ call on the sector, given there was already strong demand for rubber medical gloves from the US since the fourth quarter of 2019 (4Q19) after the US imposed tariffs on China-made medical gloves.
Ng’s top picks for the sector are Top Glove (target price [TP] of RM7.10) and Kossan Rubber Industries Bhd (TP of RM5.70).
Apart from Top Glove, which will report results by end-March, rubber glove companies under Affin Hwang Capital’s coverage reported a 19.5% quarter-on-quarter (QoQ) increase in 4Q19 earnings, supported by stronger demand from the US.
“Overall sector performance for 2019 was within our expectations, but fell short of the street’s, as profits constituted 94% and 92% of respective forecasts.
“We are expecting a stronger 2020 (growth of 13.6%), as we believe the sector would likely benefit from stronger demand arising from Covid-19 and a weak ringgit against the US dollar,” it wrote in a recent note.
BIMB Securities Research said QoQ earnings rose led by Top Glove and Kossan, mainly due to higher sales volume.
“Unabated worldwide spread of Covid-19 with more countries affected and new hotspots emerging namely South Korea, Italy and Iran, has led to the WHO advising the world community to beef up their healthcare supplies.
“Given the uncertainty as to when this outbreak could be contained, worldwide glove demand is expected to spike and remain strong for the immediate future. Global demand for gloves increased by average 12% during the SARS and H1N1 outbreaks,” the firm said.
BIMB Securities is also ‘Overweight’ on the sector, with earnings to improve on rising demand and better margins.
Its top pick is Kossan due to undemanding valuation and superior profit growth.