Glove stocks have more upside in 2021

By NUR HANANI AZMAN / Pic BLOOMBERG

SHARES of glovemakers are expected to see some upside from higher demand for rubber gloves and average selling prices (ASPs) driven by the global rollout of vaccines and testing frequency.

Hong Leong Investment Bank Bhd (HLIB Research) has retained its ‘Overweight’ stance on glovemakers as it expects the vaccination demand for gloves to offset the decline from testing demand for the remainder of the year.

“Even with global supply expected to rise by 20%, we expect there to be a supply shortage of circa 12.4 billion pieces in 2021.

“Based on our new valuation methodology, our top pick Top Glove Corp Bhd’s target price (TP) is lowered from RM10.54 to RM8.06, while maintaining ‘Buy’,” HLIB Research analyst Gan Huan Wen said in a note yesterday.

With global vaccine rollout taking shape, Gan projects glove ASPs to remain elevated at around US$115 (RM463.70) to US$140 per thousand pieces for now, with a possible decline in the fourth quarter of 2021 (4Q21) at the earliest as the US is expected to reach herd immunity by 4Q21 and full vaccination by 1Q22.

“However, with vaccinations happening more rapidly in affluent Western countries than the rest of the globe, current estimates indicate global herd immunity could take as long as five years. This would provide support for glove demand in the medium term,” he said.

While it is still unknown how the second strain variants affect existing vaccines, there is a possibility that existing vaccines prove ineffective against newer variants.

A recent study suggested the Oxford University-AstraZeneca plc Covid-19 vaccine is less effective against a mild viral variant first identified in South Africa.

HLIB Research noted that if all 31% of US citizens who say they would not take the vaccine do not get vaccinated, the US would not be able to achieve herd immunity — which can potentially prolong the Covid-19 pandemic.

“We switch our valuation methodology from straight price-earnings (PE) multiple to a modified discounted cashflow valuation. “We value the glove companies using their pre-pandemic five-year average PE multiple of 2015 to 2019 based on sustainable earnings in a post-super normal earnings environment summed with free cash- flows, both discounted back to present value, generated during the boom period,” he added.

Gan said this encompassed earnings in a post-pandemic era, as well as high profits generated during the pandemic.

“We rejig our forecasts as we expect high ASPs to sustain until 4Q21.

“Despite share prices correcting downwards, we do not expect vaccine rollout to be as straightforward as the market suggests, as logistical, procurement, anti-vaccination movement and second strain issues could derail efforts, and thus provide support for glove demand,” he said.