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Is there still upside potential as the craze for glove makers fades?

KUALA LUMPUR (Nov 17): This year’s darlings — glove stocks — have been under downward pressure in recent weeks as the market is factoring the downside risks of these manufacturers.

JF Apex research head Lee Chung Cheng, who has a hold call on the sector, said the window of opportunity for glove stocks is getting slimmer as it is approaching the time when the COVID-19 vaccine is rolling out early next year.

“Most probably, the market will start cyclical play, banking on economic recovery themes. You can see investors are switching out from healthcare to the recovery plays,” he told theedgemarkets.com.

While the glove makers' share prices have come off from their peaks, he opined they are still trading slightly on the upside.

The latest news is that Moderna Inc announced that its experimental vaccine is 94.5% effective in preventing COVID-19 based on interim data from a late-stage trial, becoming the second US drugmaker to report results that far exceed expectations.

This came on the heels of news that Pfizer Inc and BioNTech's experimental vaccine is more than 90% effective pending more safety data and regulatory review.

On top of that, in China, there are five vaccines that have entered late-stage human tests overseas.

Such newsflow continued to weigh on glove makers and led to a massive selling pressure on the stocks.

Hartalega Holdings Bhd fell 88 sen or 5.72% to RM14.50, making it the top loser today. If compared with its record high of RM20.50 on Aug 3, the stock has declined 29.27%.

Supermax Corp Bhd is the second top loser, falling 78 sen or 8.88% to RM8. The counter has lost 32.72% from its record high of RM11.89 on Aug 6.

Top Glove is also one of the top fourth losers, declining 58 sen or 7.46% to RM7.20. The counter has fallen 25% from its recent peak of RM9.60 on October 19.

Kossan Rubber Industries Bhd was also one of the top 10 losers, dropping 40 sen or 6.01% to RM6.26 today. It has declined 34.72% from its peak of RM9.59 on August 6.

Fortress Capital Asset Management chief executive officer Thomas Yong opined that positive sentiment in gloves is likely to reduce with the news of vaccines rolling out.

“Estimates in the street vary to a certain degree, hence analysts who pegged their target price to a very optimistic valuation might lower their target valuation,” he said.

However, he noted that the sector is still supported by solid fundamentals where the companies have delivered supernormal earnings growth so far, which is not going to stop abruptly after the discovery vaccines.

“Following the massive sell down last week after the news of vaccines was reported, the valuation of glove players came down to quite a fair level and is becoming less expensive,

“The big four players experienced a drop in share price ranging from 8.3% to 15.6% last week, but their robust earnings will continue in the next few quarters as most of the glove players have very strong order books compared with the pre-pandemic level,” he said.

Another fund manager, however, opined that the gloves sector is lacking a catalyst to move on.

“Valuation comes and goes. Will Top Glove make a lot of money? Yes, they will. But will the market continue to pay them the premium valuation? It is hard to say,” the fund manager said.

“A lot of expectation has been built into the gloves valuation earlier on. As the COVID-19 vaccine appears, a year from now, the gloves demand may not be as good, its average selling prices may drop too, and the market will price them accordingly,” he said.

According to Bloomberg, Hartalega is now trading at a price-earnings (PE) ratio of about 49.2 times; Top glove is at 32.64 times; Supermax and Kossan are trading at 16.09 and 26.44 times respectively.

According to AmInvestment Bank Research’s Thong Pak Leng, glove counters which were traded at between 30 to 40 times during the pandemic outbreak, had been traded at around 20 PE before the pandemic.

“We have already in few months ago talked about vaccine in our sectoral report. The vaccine may cause some selling pressure, and we have already downgraded the sector to hold,” Thong told theedgemarkets.com.

He maintained his hold call on the sector as his call has reflected the impact of COVID-19 vaccines.

“The only concern now is that many companies are jumping on the rubber glove bandwagon, and that may lead to oversupply in future,” he said.

He also expects glove average selling prices to decline as there is no longer a rush for gloves compared with what happened at the beginning of the pandemic.

Meanwhile, MIDF Research’s analyst Ng Bei Shan maintained her buy call on the gloves sector, as she thinks the glove maker valuations are justified with their earnings.

“The reason that people think the valuation was very high was because the glove average selling prices had not gone up (previously), and the results of gloves companies had not been announced.

“But now that the companies have released their results which showed the ballooning net profits they are making, it also means the valuation has come down by a lot,” she said.

She is still anticipating quarter on quarter earnings growth for glove makers in the upcoming results.

http://www.theedgemarkets.com/article/there-still-upside-potential-craze-glove-makers-fades

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