Strong demand for glove stocks will continue

By ASILA JALIL / Pic TMR

INTEREST in glove stocks will remain strong despite news of Covid-19 vaccine rollout which has caused glove counters to underperform since November last year.

Maybank Kim Eng head of regional equity research Anand Pathmakanthan advised investors to hold onto glovemaker stocks as demand for gloves will not dramatically decline.

“Investors are still very much in the recovery trade, so they are reducing their exposure to glove stocks which were benefitting from the pandemic. Our view is that you should keep some glove stocks in your portfolio,” he said during a webinar titled “Market Outlook 2021: Steering through Volatility” yesterday.

Anand said although the vaccine will be rolled out in Malaysia soon, it will take time before the country can reach herd immunity.

He added that the vaccine only reduces the symptoms of Covid-19, but will not entirely stop someone from getting infected.

The main concern on glove stocks is supply as there will be a lot of supply coming on stream in 2022 and that could put pressure on average selling price (ASP).

He said 2021 will still be a “fantastic year” for glove stocks as the ASP is still moving up and the waiting time for glove order backlog is between 12 and 15 months.

“We need the glove stocks to re-attract investors’ interest by making better use of the tonnes of cash they are building up on their balance sheet.

“The cashflow of glove stocks is massive. Top Glove Corp Bhd and Hartalega Holdings Bhd will be sitting on RM6 billion to RM7 billion net cash in the next two years based on our projections,” he said.

He said glovemakers need active capital management, which means more share buybacks and higher dividends.

Anand said banks are “safe” as they do not have issues with balance sheets and the sector has a strong capital base and is not short of liquidity.

He, however, said loan growth is still very low and a big recovery is not foreseeable this year.

“We think 3% plus is the best the banks can do,” he said.

The targeted loan moratorium also does not pose a big problem to the banks as it serves the purpose of allowing lenders to help borrowers wherever possible.

Another blanket loan moratorium, however, would have been damaging to the banking sector.

“The cost of a delinquent loan is much worse than the cost of giving them two or three months of interest-rate relief to keep their businesses going,” said Anand.

The glove sector is estimated to record an earnings growth of 120.2% this year, while the banking and finance sector will record an estimated earnings growth of 17.6%.

The research firm also forecasted for the FTSE Bursa Malaysia KLCI to reach 1,830 points this year. Maybank Investment Bank Bhd chief economist Suhaimi Ilias said real rates will turn negative this year even if Bank Negara Malaysia maintains the Overnight Policy Rate (OPR).

The firm is of the view that the inflation rate will rebound to 2% this year after recording a deflation of -1% last year.

“What this means is that the real OPR minus inflation rate will turn negative this year to around -0.25%, against a real OPR of 2.75% last year,” he said.

BNM decided to maintain the OPR at 1.75% yesterday following a global recovery outlook and a projected economic growth in the country.