Glove stocks to surge on virus resurgence

ASP has risen for September to December delivery, suggesting that the robust demand will continue over the next few quarters


THE rapid resurgence of Covid-19 infections globally could trigger another wave of profit-seeking investors taking advantage of glove counters as demand for the single use product remains on the rise.

Aberdeen Standard Investments (M) Sdn Bhd country head Gerald Ambrose said glove shares may only hit their peak price when supply starts to rise up to meet demand.

At present, demand for gloves is still rising faster despite increasing supply.

“It is almost impossible to forecast, but gloves could have another surge. They are still cheap on a price-to-earnings ratio,” Ambrose told The Malaysian Reserve (TMR).

However, he said glove manufacturers’ fortune may fluctuate on expectations of a vaccine and the state of the Covid-19 spread.

“The world (except China) seems to be in the throes of a second wave and big pharma companies seem to be postponing the time when vaccines will be approved and ready for mass distribution.

“It, therefore, looks like there might be another round of profit-taking followed by another round of buying,” he said.

Glove counters broadly closed in the red on Wednesday despite the strong latest quarterly financial performance announced by a few of the glove companies.

The top three biggest glove companies on Bursa by market capitalisation — Top Glove Corp Bhd (RM71.9 billion), Hartalega Holdings Bhd (RM61.8 billion) and Supermax Corp Bhd (RM25.7 billion) — closed lower on Wednesday by 1.49% to RM8.78; 1.42% to RM18.02 and 3.37% to RM9.45 respectively.

Ambrose said the market has discounted strong 2020 results for glovemakers and investors’ attitude seems to be “buy as the market adjusts forecast upwards, but sell when the news comes out”.

“I think share price movements are not a function of good results nowadays, but more of a function of how much they beat expectations. Gloves are the exceptions because though it sounds crazy, they are almost expected to beat expectations. So, it was a ‘sell on news’ day,” he said.

Supermax posted a net profit of RM789.5 million in the first quarter ended Sept 30, 2020, for the financial year 2021 (1QFY21), nearly a 32-fold increment from the RM24.7 million profit it made in the same period last year.

Revenue increased 265.6% year-on-year (YoY) to RM1.35 billion in 1QFY21, mainly attributed to an exponential increase in demand globally for medical gloves and other personal protective equipment following the global outbreak of the Covid-19 pandemic, the company said in a Bursa filing.

Supermax said demand continues to increase and it is in an oversold position along with average selling prices (ASPs).

Hartalega posted a 424.5% increase in net profit to RM545 million in 2QFY21 as revenue soared by 89.7% YoY to RM1.35 billion, driven by higher ASPs and capacity.

In a report on Supermax, Kenanga Investment Bank Bhd analyst Raymond Choo Ping Khoon said ASP has risen for September to December delivery, suggesting that the robust demand will continue over the next few quarters.

“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 gloves manufacturing segment,” Choo said in a report on Wednesday.

He said demand will stay strong at least over the next two years and shortage in supply will remain tight due to formers shortage and raw material constraint.

In a report on Hartalega, Public Investment Bank Bhd analyst Chua Siu Li said the company’s ASP still lags behind its peers as the group plans to further raise its ASP by another 40%-50% in the coming quarter to narrow the pricing gap.

Besides higher ASPs, glove manufacturers are also building new plants, which are scheduled for completion in the next one or two years, to increase capacity.

FSMOne Malaysia (previously known as Malaysia) assistant portfolio manager Jerry Lee said in terms of financial results, the performance of glovemakers has yet to reach its peak.

He said ASPs will likely continue to increase over the next one to two years, based on the guidance from select companies as many have started their expansion plan.

“Supply is likely to increase in 2022. However, we do expect the global demand to continue to be strong. Hence, the increasing supply is unlikely to affect the ASPs moving forward, but will contribute positively to the total revenue of glove players,” Lee told TMR.

He said the drop in glovemakers’ share prices on Wednesday was mainly due to profit-taking despite the string of stellar results.

The fund manager added that the rally in share prices over the past six to seven months, to a certain extent, would have factored in the strong financial result.

“The market interest toward glove counters is likely to peak when there is a positive development on the Covid-19 vaccine. By then, the market would have expected the vaccine news to affect the global demand for gloves.

“From a sentiment perspective, the market might lose interest in gloves, causing a dip in share prices if there is any positive development from the vaccine front,” Lee said.

He further said investors should take note that it would take time for drugmakers to mass-produce vaccines.

He said the market has seen a structural change, and the global demand for gloves will unlikely fall to pre-Covid-19 levels even if there is a vaccine for Covid-19.