Glove sector will benefit from the Covid-19 outbreak because the surge in demand for rubber gloves, says MIDF Research analyst

by NUR HANANI AZMAN/ pic by ARIF KARTONO

HARTALEGA Holdings Bhd’s earnings are expected to soar as rubber glove producers are experiencing higher demand due to the Covid-19 pandemic that could lead to higher average selling prices.

MIDF Amanah Investment Bank Bhd Research (MIDF Research) analyst Jessica Low Jze Tieng said Hartelaga stands to benefit from the higher glove demand from the North American market.

“We think it could be due to the solid earnings reported by Hartalega and the positive earnings prospect. Glove makers are ramping up their production to cope with a surge in demand.

“The glove sector will benefit from the Covid-19 outbreak because the surge in demand for rubber gloves could potentially lead to higher average selling prices of gloves,” she told The Malaysian Reserve (TMR).

Hartalega advanced 0.9% or six sen to close at RM6.68 with a market capitalisation of RM22.59 billion.

Last week, Malaysian Rubber Glove Manufacturers Association (Margma) urged the government to allow glove manufacturers to run at full capacity during the Movement Control Order period compared to the current 50% operating load.

Its president Denis Low (picture) said every healthcare worker is mandated to wear a pair of gloves to fight Covid-19, which highlights the importance of rubber gloves to the world.

Meanwhile, AmInvestment Bank Bhd analyst Nafisah Azmi believes that orders for gloves during the outbreak are high as customers stock up more than usual as a pre-emptive measure.

“However, the sharp improvement then was also attributed to Hartalega’s dominance in the nitrile glove market as it benefitted from the pivotal shift in demand from natural gloves to nitrile gloves.

“We like Hartalega for its long-term prospects underpinned by capacity expansion, product innovation and superior operating efficiencies,” she said in a research note.

AmInvestment has raised its price to earnings (P/E) multiple for Hartalega to 38 times (+1 standard deviation [SD]) on forecasted FY21 (FY21F) earnings per share.

“We increase our FY21F earnings by 2.4% but reduce our FY22F earnings forecast slightly by 0.4%.

“We think that the Covid-19 pandemic would be contained by the first half of financial year of 2020 (1HFY20) and subsequently, demand for gloves would taper off,” she added.

The World Health Organisation (WHO) has declared the coronavirus, Covid-19, a pandemic, urging governments to step up containment efforts as the number of worldwide cases topped 294,110 and deaths exceeded 12,940 (at press time).

Nafisah said Hartalega’s earnings and share price had also shot up during the previous pandemic outbreak.

“At the start of the 2009 to 2010 H1N1 pandemic, Hartalega’s share price was RM0.28 and it jumped to RM0.68 by the end, about 15 months later.

“Previously during the H1N1 pandemic, Hartalega’s revenue and net profit rose 29.0% and 69.5% respectively in FY10 as demand soared,” she said. This resulted in a 5.9ppt improvement in net margins (25% in FY10).

Hartalega’s one-year average trading P/E was 7.9 times before WHO declared H1N1 as a pandemic. Its P/E peaked at 16 times (+4.1SDs) in March 2010.

“We expect Hartalega’s fourth quarter of FY20F will be strong on the back of contribution from its newly commissioned Plant 6 as well as benefit from an expected increase in demand for gloves arising from the Covid-19 pandemic.

“We forecast Hartalega’s FY21F net earnings to grow by 16.2% year-on-year and net margin to improve to 15.8% from 14.7%,” she added.

Assuming that the Covid-19 pandemic is contained in 1HFY21F, AmInvestment anticipates a drop in sales growth in 2HFY21F onwards from an excess supply situation in the customer’s inventory.

“We forecast FY22F net margins to contract slightly by 0.5ppt to 15.3% and net earnings growth of 4.5%,” said Nafisah.