Record earnings expected for glovemakers in 2020


LISTED glovemakers are expected to achieve record earnings in 2020 with the current demand for rubber gloves likely to remain robust, unless the Covid-19 pandemic is deemed no longer a threat.

Affin Hwang Investment Bank Bhd said demand for rubber gloves has continued to surprise on the upside as some manufacturers have started accepting orders for delivery one year in advance with 20% deposits.

“The strong demand has also given manufacturers the flexibility to continue raising selling prices, which we are now forecasting at 5%-8% per month starting from June, higher than the 1%-2% per month we forecasted earlier.

“Although selling prices will only be confirmed one to two months before delivery, buyers are still likely to take delivery or risk losing their deposits,” it wrote in a recent note.

A shortage of gloves will also persist in 2021 as only a 10%-12% increase in effective capacity is expected in 2020, though the shortage in supply will be less than the current situation.

As such, Affin Hwang forecasts average selling price (ASP) to increase by between 3% and 5% for the whole of 2021.

“We believe demand could ease if a vaccine for Covid-19 is available to the public,” it said.

Glovemakers have continued to outperform the domestic stock market, with shares rising over 30% in the past two weeks and outpacing the FTSE Bursa Malaysia KLCI by 32.5%.

The sector’s price-to-earnings (PE) ratio is also currently trading at +2SD of its historical average.

Even so, there could still be room to climb further, said Affin Hwang.

“Although the sector PE ratio is currently trading at +2SD of its historical average, we don’t think valuations are overstretched yet as there could still be upside risk to the earnings forecasts given that we have assumed demand to normalise by the second half of 2021 (2H21).”

No negative surprises in glove firms’ earnings are expected for the next few quarters at least, amid a lack of execution risk.

Affin Hwang is ‘Overweight’ on the sector, given the high certainty on industry earnings. Its top picks are Top Glove Corp Bhd and Kossan Rubber Industries Bhd, with higher target prices (TPs) of RM12.60 (RM8.70 previously) and RM8.50 (RM7 prior) respectively.

It also raised Hartalega Holdings Bhd to ‘Buy’, with a higher TP of RM10.20 (RM7.70 previously).

Profit-taking activity in the market yesterday saw Top Glove closed two sen lower at RM10.48, Kossan fell 15 sen to RM7.58, Hartalega down 12 sen to RM9.01 and Supermax Corp Bhd closed 21 sen at RM4.25.

Hong Leong Investment Bank Bhd upgraded the rubber glove sector to ‘Overweight’ from ‘Neutral’ on the promising outlook for rubber glove producers, given stronger demand driven by Covid-19.

“The onslaught of Covid-19 has led to a global surge in demand for gloves. This has increased ASP alongside higher utilisation rates. We raise the earnings forecast of our coverage to reflect this and also apply higher valuation PE multiples (from +1.5SD to +2SD),” it said.

Its top pick remains Top Glove (‘Buy’ with TP of RM13.50 from RM7.40 previously), while Hartalega is upgraded from ‘Hold’ to ‘Buy’ (TP of RM10.08 from RM5.99 previously).

Kossan remains on ‘Hold’ (TP of RM8.11 from RM5 previously), while condom maker, Karex Bhd, is upgraded from ‘Sell’ to ‘Hold’ (TP of 59 sen from 36 sen previously).

Kenanga Investment Bank Bhd stated Supermax is set to benefit from improved pricing power and margins from own-brand manufacturing distribution although this has been largely under-appreciated by investors.

It maintained an ‘Outperform’ call on Supermax with a raised TP of RM4.50, and hiked net profit estimates for the company’s financial years ending June 30, 2020 (FY20) and FY21 by 8% and 34% respectively, to account for higher ASP and utilisation.