JP Morgan: Rubber gloves technical rally not supported by fundamentals

Excess capacity should still take two years to digest even if expansion plans are halted and old capacity is retired


TECHNICAL rally for the rubber glove manufacturers does not appear justified by fundamentals, says a foreign research house.

“It is still a tad early to bottom fish, in our view and see losses potentially persisting for at least two more quarters and are not confident of profitability recovering sharply immediately after bottoming,” said JP Morgan Research in a note released last Thursday.

It said excess capacity should still take two years to digest even if expansion plans are halted and old capacity is retired.

JP Morgan estimates that Top Glove Corp Bhd trades at 16-time multiple even on the assumption in the fiscal year 2023 (FY23E) profits revert to FY19 levels. On similar assumptions, Hartalega Holdings Bhd trades at 15-time but is cheaper at 11x on an ex-cash basis.

“We do not see these multiples as value offerings relative to today’s rising rates environment,” it said.

Kossan Rubber Industries Bhd’s net cash of RM2 billion is 67% of market capitalisation, implying four-time ex-cash price to earnings and trading below replacement cost, thus making it attractive from a value perspective, the report noted.

The report suggested that short covering and the fear of missing out may have promoted the recent rally on rubber glove-related stocks on the Malaysian stock exchange.

“Short covering might have kick-started the rally, in our view. The rally took place post end Sept-22 which coincided with the end of heavy selling from one of (Top Glove) and (Hartalega)’s major shareholders. We believe short covering happened as the selling pressure eased which started the initial 10% rebound from the bottom,” it said.

It added that the likely index exclusion from KLCI of the two counters from late November drove up the non-tracking cost of borrowing to 40%-50% in mid-October as shareholders recalled their shares ahead of the exclusion event, noting that the mini short squeeze appears to have fueled the rally further. 


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