KUALA LUMPUR (Oct 21): MIDF Research has upgraded its rating of the glove sector to "positive", from "neutral", saying the sector is deemed defensive and at the moment recession-proof.
In a sector update today, MIDF’s analyst Ng Bei Shan said the market capitalisation (cap) of Supermax Corp Bhd (Supermax) and Kossan Rubber Industries Bhd (Kossan) have stayed above the RM20 billion mark.
““As such, they are likely to be included as the Kuala Lumpur Composite Index (KLCI) component stocks in the upcoming FTSE review in December.
“If and should the two stocks be included, the weightage of glove counters on the KLCI may possibly increase to 30% to 40% from about 15% currently based on the latest market caps of the top four glove companies listed on Bursa,” she said.
Ng said the glove makers are deemed to still be in their business upcycles as earnings are still expected to grow significantly in the few quarters.
“Looking beyond the near-term surge in profits, we expect that growth will be driven by organic growth in demand due to higher hygiene awareness, production capacity, product innovation and improvement in production processes,” she said.
The growth is also likely to be supported by higher allocation in budget for personal protection equipment by government agencies and health departments, she added.
Based on channel checks, supply for medical gloves remains tight and average selling prices (ASPs) are still in an upward trajectory after the jump seen earlier in the first half of the year, said Ng.
“Ex-factory prices are expected to grow by 30% to 40% in the third quarter 2020 compared to the second quarter 2020. Following that, there may be another increase of 40% to 50% in the fourth quarter 2020.
“As such, the glove makers are likely to beat their own records seen in the last quarter in the upcoming two quarters,” she said
She also expects that ASPs are likely to remain high in the financial year 2021 based on a base-case scenario of vaccine availability in mid-2021, and the administration of vaccines will also require the usage of gloves.
“We believe that demand for gloves will remain high into 2022 due to the organic growth of the industry, coupled to higher hygiene awareness,” she said.
She said that given the pandemic, the demand for rubber gloves is expected to grow at a pace of over 20% from about 10% previously.
Besides, lead time for nitrile rubber gloves continues to increase quarter-on-quarter, with some manufacturers seeing lead time increasing to more than 400 days compared to 30 days to 40 days previously.
Ng highlighted the long waiting time implied that demand for rubber gloves remains strong.
“As the current supply is for immediate usage, industry players expect another 6 to 8 months for their customers to build up their inventory, which may imply that supply deficit may last for two years.
“And as such, ASP is likely to remain high and unlikely to revert to a pre-pandemic level at least in the next two years,” she said.
Ng also believes that it is still too early to conclude that the discovery of a vaccine could negatively impact ASPs for gloves, as she opines that the demand for gloves should remain high due to the mass administration of the vaccination required.
On the remediation fees for foreign workers, Ng said that its impact to the companies’ bottomline is estimated to be less than 1%.
“While this ongoing issue may cast somewhat of a negative publicity on the glove companies, they have been taking pro-active measures to address them since last year.
“As the payment will be one-off, it should not have a negative impact on the companies in the long run,” she said.
She also does not think the new players entering the fray will have a significant impact on the industry.
“As the new entrants are likely to start-off small in the first two-years of their establishment, they are expected to contribute to less than 5% of the total production in Malaysia in 2021,” she said.
Following the latest updates, Ng revised up Top Glove Corp Bhd’s earnings forecast by 55%/73%/40% for financial year 2021/2022/2023 while earnings estimate for Hartalega Holdings Bhd was revised by 66%/56% for financial year 2021/2022.
Similarly, earnings estimate for Supermax was adjusted by 34.8%/81.4%/75.2% for financial year 2021/2022/2023 while earnings forecast for Kossan Rubber was revised by 31%/90%/49% for financial year 2020/2021/2022.
Ng also said, operating cash flow for the glove companies under MIDF’s coverage has grown by 3 to 6 times year-on-year in the last quarter, and the companies are also in net cash position now.
“This has also reduced finance costs for the glove companies and with the additional cash in hand, they are able to speed up their expansion plans or to bring forward some of the future production capacity that they have already planned for even before the pandemic starts,” she said.
In addition, the companies under her coverage have been paying at least 30% of their profits.
Based on her estimates, the dividend yield for Top Glove is 5.1%/2.3% for financial year 2021/2022. Meanwhile, dividend yield expected for Hartalega is 2.1%/1.9% for financial year 2021/2022, Kossan is 2.2%/1.4% financial year 2021/2022, Supermax 3.1%/3.0%.
“We opine that the dividend yields are considerably decent in the low interest rate environment and the strong cash flow can help the companies fulfil their dividend policies with ease. Furthermore, any potential special dividends may further boost the appeal of the estimated dividend yield,” Ng said.
She maintained buy on top glove Corp Bhd and Supermax Corp Bhd, with higher target prices of RM10.96 (previously RM9.63) and RM13.83 (previously 12.43), respectively.
She also upgraded Hartalega and Kossan to buy from neutral, with higher target prices of RM22.96 (previously RM20.73) and RM10.02 (previously RM7.68).
Gloves makers’ rally halted today as investors took profit on the stocks. At 10.32 am., Top Glove fell 35 sen to RM9.13; Supermax dropped by 49 sen to RM9.87; Hartalega slipped 10 sen to RM18.94; Kossan decreased by 30 sen to RM7.83.