KUALA LUMPUR: AmInvestment Research is downgrading its call on the glove sector to “neutral” from “overweight” as at the current share price levels, the valuations for glove companies under its coverage – Top Glove Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd – have fully priced in the companies’ earnings outlook.
“We think that the average selling prices (ASPs) will begin to taper off in first quarter 2021 after the expected increase in ASP until end-2020, which have been priced in. Share prices of all of the glove companies in our coverage have exceeded their target prices, ” it said in a research note.
Top Glove is currently trading at forecast calendar year 2021 price-to-earnings (PE) of 43.3 times, which is two standard deviations higher than its three-year average forward PE of 28.9 times.
Kossan Rubber’s forecast calendar year 2021 PE of 26.0 times is almost one standard deviation higher than its three-year average forward PE of 23.7 times.
Hartalega is presently trading at forecast calendar year 2021 PE of 40.9 times, which is slightly higher than its three-year average PE of 39.5 times.
“An increase in industry capacity would exert downward pressure on selling prices. The big glove producers (Top Glove, Kossan, Hartalega, Supermax and Sri Trang) have plans to increase capacity by 21% in 2020,23% in 2021 and 27% in 2022.
“We believe that higher supply of gloves from the expanded capacity will more than offset the increase in demand. Moreover, we think that recent strides in vaccines formation will affect the ASP of gloves as the urgency of orders would be lessen.
“We are not making any changes to our earnings forecasts as we have already assumed that a Covid-19 vaccine would be available by second half 2021, ” it said.
AmInvest Research said the glove companies’ capacity expansion plans would add 126 billion pieces (54%) of capacity in two years by end-2022.
“Although this bodes well in terms of the ability to cater to higher volume of orders for the next one to 1½ years, we think that a short-term supply glut will come back into play in 2022.
“On a positive note, we expect sales volume to continue growing in 2021 as we anticipate a structural change in the way gloves are used. There will be a new normal where glove usage per capita will increase as hygiene measures become stricter.
“The glove consumption per capita in emerging markets such as India and China is low at around two to six gloves as opposed to circa 100–280 gloves for developed countries, ” it said.
AmInvest Research said it took this opportunity to downgrade its call on Top Glove and Kossan to “hold” while it maintained its “hold” call on Hartalega.
“We now have a ‘hold’ call on Top Glove with unchanged fair value (FV) of RM25.70. Our valuation is based on 33 times forecast calendar year 2021 EPS. We assume an ASP of US$35 in FY21 and US$25 in FY22.
“We reiterate our ‘hold’ call on Hartalega with unchanged FV of RM18.74. Our valuation is based on 45 times forecast calendar year 2021 EPS. We assume an ASP of US$30 in FY22 and US$27 in FY23, ” it said.