Expanded use of gloves to propel glovemakers higher


STRUCTURAL changes in glove usage across healthcare, and food and beverage industries are expected to help maintain the healthy demand for gloves as the rules around hygiene and safety have become much stricter beyond the Covid-19 pandemic.

AmInvestment Bank Bhd analyst Nafisah Azmi opined that glovemakers and glove-related counters will likely echo their performance into the second half of the year (2H20) as consumers pay for higher spot orders and subsequently reduce the risk of overcapacity in the industry.

She added that with the new “normal”, glove usage per capita will increase, particularly in emerging markets such as India and China, from a low of around two to six gloves to circa 100 to 280 gloves for developed countries.

“We think rubber glove’s average selling price (ASP) will face a downward pressure in year 2022F (assuming full containment of Covid-19) due to lower urgency of orders with higher supply of gloves from expanded capacity,” she said in a note last Wednesday.

The stock prices of glovemakers like Top Glove Corp Bhd, Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd hit new historic highs last week at RM18.46, RM9.41, RM9.33 and RM16 respectively, as investors priced in a strong earnings performance for the second quarter (2Q20).

Nafisah noted that the big glove producers have plans to increase capacity by 16% in 2020E, 11% in 2021F and 10% in 2022F.

“This will add 74.6 billion pieces of capacity by end-2022. Although this bodes well in terms of ability to cater to higher volume of orders for the next one to 1.5 years, we think short-term supply glut will come back into play in 2022F,” she said.

Nafisah expects sales volume and ASP to grow exponentially in 2H20 due to the Covid-19 pandemic as healthcare providers and consumers avoid cross contamination.

“The higher demand has resulted in a shortage of supply, pushing up ASPs for these medical gloves.

“ASPs are trending upwards and glovemakers now guide for around 5% to 15% quarter-on-quarter gradual increases, while spot selling prices for gloves have skyrocketed 100% to 400% in the past few months as panic buying of gloves ensues,” she said.

Total rubber glove export value from Malaysia grew 21.4% year-on-year to RM6.87 billion in January till April 2020.

“We think the trend will continue well into 2021 until a Covid-19 vaccine is available to the masses. In the meantime, usage of rubber gloves will remain a priority not only in the medical sector but across various industries,” Nafisah said.

AmInvestment is keeping its ‘Overweight’ call for the glove sector and believes product prices will continue to soar in the next 12 months as lead time on orders stretches up to 12 months.

The stronger ringgit will further help expand net margins for glove companies because unlike pre-Covid-19 times, cost savings are not passed through to customers due to supply constraints.

The research house’s projection for the US dollar-ringgit rate is an average of 4.29 in 2020 and 4.25 in 2021.

Public Investment Bank Bhd said better operational efficiency and increase in ad-hoc orders, which are generally priced at 50%-150% from the ordinary recurring orders, will continue to boost earnings of the glovemakers.

“We caution that such supernormal profits are not sustainable in nature. As such, we recently downgraded our rating on the sector from ‘Overweight’ to ‘Neutral’,” the firm said in a 1Q20 result round-up report last Thursday.

MIDF Amanah Investment Bank Bhd said the widening of Covid-19 outbreak worldwide has led to higher demand for gloves and resulted in an upward revision in ASP.

“Earnings of glovemakers were also helped by lower raw material prices and strengthening of the US dollar.

The research firm in a corporate earnings review for the quarter ended March 2020 stated that earnings outlook for glovemakers remains positive in 2H20.

“Hence, we maintain ‘Neutral’ on the sector,” the firm said.