KUALA LUMPUR (June 15): While some analysts maintain their call to “buy” on glove stocks, fund managers have become cautious of the sector as a lower Average Sell Price (ASP) is expected lead to lower earnings and valuations.
Fortress Capital Asset Management CEO Thomas Yong said the glove industry is now entering a downward trend in earnings, caused by the standardization of ASP and declining sales volume due to problems. logistics.
According to him, there is no longer an acute demand for gloves as vaccination rates in advanced countries have accelerated, leading to a drop in the number of active cases. Instead, only moderate demand is observed for gloves.
“This has a significant impact on the industry as these countries, mainly the United States and European countries, are the main contributors to the revenues of Malaysian glove companies,” he told The Edge.
Yong also noted that allegations of forced labor by U.S. Customs and Border Protection (CBP) against a major manufacturer of rubber gloves served to accelerate the downward trend in ASP. Indeed, the company resorted to selling gloves to other countries at a lower price after being banned from exporting to the United States.
Other glove makers have no choice but to follow suit to maintain their competitiveness in the market, he said.
Yong estimated that in the future, the incumbent manufacturers in the sector will face the challenges of emerging Chinese manufacturers with aggressive capacity expansion plans, although Malaysian players are still ahead of the learning curve, in especially in terms of production technology.
“When there is a plentiful supply in the market, perhaps in the near future, competition among glove manufacturers will return soon,” he said.
According to Yong, the market generally values glove manufacturing companies using their two to three year futures earnings given the post-pandemic earnings normalization.
“Even though the valuation is not high, the market may not be as interested in this sector as it used to be due to its bleaker outlook now,” he said.
Meanwhile, Ang Kok Heng, chief investment officer of Philip Capital Sdn Bhd, said he no longer had any stock of gloves.
“Industry ASP is declining. Competition has intensified as more players arrive. This could reduce ASP faster than expected,” he told The Edge.
Ang expects glovemaker profits and stock prices to normalize to pre-pandemic levels after one to two years.
A fund manager who declined to be named said he was also not optimistic about the outlook for the gloves sector.
“The sector is on a downtrend and there is no immediate catalyst, especially given the global effort to promote immunization,” he said when contacted.
The fund manager also referred to Top Glove Corp Bhd’s confirmation that ASP will continue to decline in the future, and said investors will need to take this into account to come to a fair valuation.
“It’s hard to say when their stock price will bottom out. Most of their prices are still significantly higher than two or three years ago,” he said.
Areca Capital Sdn Bhd CEO Danny Wong said he takes a neutral stance on the glove industry.
“The sector’s profits remain uncertain as it depends on the standardization of ASP and production,” he told The Edge.
While some glove makers’ share prices are cheap, he said the market expects their earnings to decline and therefore their stock prices are seen as volatile.
Some analysts remain positive on glove stocks, however, due to the potential lifting of the CBP ban and attractive valuations.
Hong Leong Investment Bank analyst Gan Huan Wen said in a note last week that although Top Glove did not meet its earnings expectations, it was maintaining its “buy” call on Top Glove because he believes it is only a matter of time before the ban on CBP is lifted, which would result in a significant upturn in sales volume.
“Top Glove has indicated that ASPs should experience a gradual decline, in line with market prices. We are not surprised by this, as Top Glove’s ASPs had already reached levels unmatched by its peers.
“We believe the likelihood that Top Glove’s CBP ban will soon be lifted is favorable, as it has reached green states in the 11 ILO forced labor indicators, as verified by [third party ethical trade consultancy] Impact, ”he said.
He did, however, lower Top Glove’s target price to RM6.76 from RM7.00.
Meanwhile, as the stock prices of the Big Four glove makers have fallen 8.63% to 32.49% year-to-date, some analysts find their valuations attractive.
In notes dated May 5 and April 20, Affin Hwang Capital analyst Ng Chi Hoong reiterated his call to “buy” Supermax Corp Bhd and Kossan Rubber Industries Bhd because of their undemanding valuations.
However, he lowered his target price for Supermax to RM 7.40 from RM 10.90 previously, and for Kossan to RM 6.60 from RM 9.30.
Regarding ASPs, Ng believed that not all glove makers were facing a downtrend, as some glove makers were still selling below their peak prices, so there was still room for them to rise. the prices.
“We have already factored in a 5-10% drop in ASP for Supermax by the end of the year and a 3-5% month-over-month drop in ASP for 2022, “he said.
As for Kossan, Ng felt that there was still room for the group to increase his ASP as he was still below the industry leaders.
Thus, he still expected the company’s profit growth in 2TFY21.
“Our new forecast has already taken into account a drop in ASPs from 35% to 45% in 2022, which would result in lower profits for 2022.
“We believe that ASP will gradually decline over the next year, rather than a sharp drop as some expect,” he added.
Despite the increase in the overall capacity of new and existing actors, Ng did not expect ASPs to fall below pre-Covid-19 levels, as the current crisis would have helped raise awareness of the importance of personal protective equipment.
According to him, countries like China have also started requiring the use of medical gloves in health facilities, due to the current epidemic.
Meanwhile, TA Securities analyst Tan Kong Jin said in a May 5 memo that he was upholding his “buy” call on Hartalega Holdings Bhd with an unchanged target price of RM17.12.
“We understand that the plant utilization rate has returned to above 90% as the group has resolved its Covid-19 cases. Regarding ASP, management expects it to continue to grow quarter over quarter in 1TFY22, “he said.
He also noted that Hartalega’s annual capacity is expected to grow to 63 billion gloves over the next two to three years, up from around 41.6 billion gloves currently.
Stock prices of the Big Four glove makers rose this morning, but most of them reduced their closing gains as selling pressure kicked in.
Top Glove rose 37 sen or 7.84% to RM 5.09 in early trading yesterday, after the Nasdaq-traded American Depository Receipt gained 69% to US $ 7.50 from 4.40 $ US last Friday. However, the stock reduced most of its gains thereafter to close at just five sen, up 1.06% at RM4.77.
Since the beginning of the year, the counter has fallen by 13.27%. Bloomberg data showed that three in 10 brokers still have “buy,” “outperform” and “build” calls on the stock.
Hartalega climbed to 25 sen or 3.01% at RM 8.55, before closing at RM 8.43 yesterday for a reduced gain of 13 sen or 1.57%.
Since the start of the year, the counter has fallen by 19.56%. Six in 10 brokers recommend “buy” or “outperform” calls for action, according to Bloomberg.
Supermax closed one sen or 0.27% higher at RM 3.72 yesterday, after rising 24 sen or 6.47% to an intraday high of RM 3.95.
Since the start of the year, the counter has come out 32.49%. Bloomberg data showed the counter is not short of “buy” calls as eight in 10 brokers adopt “buy”, “add” and “outperform” calls for the stock.
Kossan closed a sen or 0.28% down to RM 3.60 yesterday, after gaining as much as 12 sen or 3.32% at RM 3.73.
Since the start of the year, the counter has lost 8.63%. Six in 10 brokers recommend “buy” and “negotiate buy” for the stock, according to Bloomberg.