Glove stocks to be resilient despite volatility

The continued rise in Covid-19 cases globally, especially in the US, will continue to drive glove demand, says research firm

by SHAZNI ONG/ pic by TMR FILE

GLOVE stocks are expected to remain resilient despite recent upheavals in the local stock market, as global glove demand remains strong amid tight supplies while the Covid-19 pandemic rages on.

Affin Hwang Investment Bank Bhd believes the continued rise in Covid-19 cases globally, especially in the US, will continue to drive glove demand.

“As there is currently still a shortage of gloves supply, we believe that manufacturers can continue to raise selling prices, which will help improve margins,” its analyst Ng Chi Hoong told The Malaysian Reserve (TMR).

“Without a publicly available vaccine, we believe the selling prices for gloves can sustain at these elevated levels.” The firm is staying ‘Overweight’ on the sector.

Last Tuesday, rubber glovemakers’ shares were hit by volatile price action due to profit-taking after hitting historic highs, while the industry mouthpiece said exports will remain strong well into next year.

Selling of the counters continued the next day, with the “Big Four” — Top Glove Corp Bhd, Hartalega Holdings Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd — dragging the FTSE Bursa Malaysia KLCI 0.8% or 13.19 points lower to 1,585 at market close.

A local dealer told TMR algorithm trading strategies might have triggered the initial selling after sell signals were indicated and triggered.

Last Thursday, shares of Top Glove plunged 9.6% to RM19.70 after the world’s biggest rubber glove producer said the US Customs and Border Protection (CBP) had prevented imports of its products over foreign labour issues, which Top Glove later said had been resolved.

Trading of the shares was suspended at 2.30pm that day after Top Glove said it was reaching out to CBP, and was to resume an hour later but failed after Bursa’s trading platform experienced “technical issues”.

When trading resumed the next day, Top Glove rallied 16.65% or RM3.28 to close higher at RM22.98 against the previous close of RM19.70, seemingly brushing off the previous day’s dumping rush.

Ng believes the firm’s exports to the US will only be temporarily disrupted by the current detention orders.

As current demand growth continues to outstrip supply, the glove producer will continue to benefit from the rising average selling price (ASP).

“As such, we are keeping our ‘Buy’ call and target price on Top Glove unchanged at RM22.40,” he said.

MIDF Amanah Investment Bank (MIDF Research) said glovemakers’ profit margins are expected to keep rising due to continuous upward revisions in ASP on robust demand, strengthening of the US dollar and subdued raw material prices.

“The impact of upward revision of glove ASP will be more significant in the second quarter of 2020 (2Q20) as ASP of gloves were set a few months before delivery time, hence the spike in ASP for the period February to April will be reflected in 2Q20,” it wrote in a recent note.

Prices of raw material such as nitrile butadiene rubber are expected to remain subdued amid trade war tensions.

“On the other hand, prices of natural rubber latex have been trending upwards recently due to the wintering season which we are not overly concerned about as the increase in ASP is more than enough to offset the increase in raw material prices,” it said.

MIDF Research, which is ‘Neutral’ on the sector, expects the earnings outlook for glovemakers to remain positive in the second half of 2020. The tight supply situation in the glove industry is seen continuing in the medium term.