Glove stocks up as Covid-19 cases rise

The renewed spread of the virus could encourage more investors back into the glove and PPE thematic as investors look for sustainable earnings


RESURGENCE of a high number of Covid-19 cases worldwide has renewed investor interest in glove counters as fears of a widespread outbreak negatively impacting the economy grow.

Investors’ bullishness on glovemakers like Top Glove Corp Bhd, Hartalega Holdings Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd made them among the top gainers in the market yesterday, while smaller glovemakers like Rubberex Corp (M) Bhd, Comfort Gloves Bhd and Careplus Group Bhd gained as well.

Supermax soared 8.13% or 73 sen to RM9.71, while Rubberex gained 5.6% or 32 sen to RM6.03. Careplus jumped 5.11% or 17 sen to RM3.50 and Kossan rose 2.87% or 42 sen to RM15.04. Industry heavyweight Top Glove closed 1.83% or 16 sen higher at RM8.92 with Hartalega gaining 0.34% or six sen higher to RM17.56. Comfort advanced 1.54% or six sen to RM3.96.

The renewed spread of the virus could encourage more investors back into the glove and personal protective equipment (PPE) thematic from other counters as investors look for sustainable earnings.

Hong Leong Investment Bank Bhd (HLIB Research) analyst Ng Jun Sheng believes the buying momentum in the local market faces the risk of a liquidity squeeze upon the expiry of the six-month grace period for loan repayments (ended Sept 30), coupled with soaring coronavirus cases and clusters locally.

“Market sentiment should worsen in the short term amid concerns of more Targeted Enhanced Movement Control Orders, which would adversely affect the greenshoots of the country’s economic recovery,” he stated in a note yesterday.

Thus, Ng said rubber glove and PPE stocks should be attractive for short-term trading amid virus resurgence worries.

Kenanga Investment Bank Bhd analyst Raymond Choo Ping Khoon maintained an ‘Overweight’ call on the rubber glove sector as average selling prices (ASPs) are still rising and prospects looking bright.

“We highlighted that the industry ASP for the months of September to December is rising monthly between 10% and 30%, indicating supply tightness has further propelled ASP higher,” he said in a note yesterday.

Choo highlighted that Top Glove’s ASP for the months of September, October and November is higher by 30%, 30% and 15% month-on-month (MoM) respectively, further indicating supply tightness.

“With a diverse customer base, we expect Top Glove to have better pricing power and hence potentially above-average industry prices. We expect a hike in raw material prices due to supply constraints which flow to higher ASPs.

“We do not expect supply to flood the market at least in the first three quarters of 2021 despite growing concern among investors that a number of Malaysian listed companies’ have announced new ventures into the glove manufacturing segment,” he said.

In anticipation of higher demand due to the pandemic, stockpiling and new users following the pandemic, players are raising capacities to meet the surging demand, Choo said.

He stated that the acute supply shortage and supernormal demand could persist over the next two years with manufacturers getting orders from new users that include airlines, restaurants, retail apparel chains and hotel operators.

“If we look at the capacity expansion numbers in isolation, they look overwhelming. Juxtaposed against the annual demand growth and new pandemic-led demand, the additional capacity is not a concern,” he said.

Overall, Choo said earnings visibility in the sector looks reasonably good for financial year 2021 (FY21) based on lengthened demand lead times and ASP momentum moving into US$100 (RM415) per 1,000 pieces rendering prospective earnings in the sector too good to ignore.

“Although orderbooks and lead times suggest that FY22 demand will remain strong while clarity on ASP diminishes, we are sold on the point that rubber glovemakers are benefitting immensely from increased demand that is sustainable.

“(This is) a step-up change that is structural out of heightened hygiene awareness that extends beyond the healthcare community,” he said.

On this point alone, Kenanga noted that there is an upside risk to its earnings projection for FY22, as the research firm has reflected conservative assumptions.

“Firstly, that ASP would normalise from US$100 per 1,000 pieces to US$40 per 1,000 pieces (on easing of supply bottlenecks) and secondly, lagging costs of production, which hitherto has been fairly contained, would likely catch up, namely labour (10% of production cost) and raw materials (45% of production cost).

“In our view, ASP US$40 per 1,000 pieces implying US$0.04 per piece which is reasonably low,” Choo added.

Kenanga’s top pick for the sector is Hartalega (‘Outperform’ call and target price of RM26.22) since ASP catch-up is expected to be reflected in the third quarter of 2020 onwards, implying strong earnings growth.