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Gloves still pique interest

SHARES of glove makers, which were the hottest stocks at the height of the Covid-19 pandemic, have been heading south - sending valuations to “reasonable” levels.

As Covid-19 vaccination progresses in many parts of the world and investors shift to recovery plays in anticipation of things normalising, glove stocks continue to see price volatility.

But while some are fleeing, others are picking shares in this cluster of stocks following the price weakness and possibly the appeal of their dividend-related windfall earnings.

Rakuten Trade’s head of equity sales Vincent Lau says there are trading opportunities for investors.

“Valuations of glove stocks have come down reasonable levels. So when prices drop to a certain level, you see investors bargain hunting again, ” he tells StarBizWeek.

He said companies’ earnings will remain good, better than pre-pandemic levels even though average selling prices (ASP) are coming down.

In the month of March for example, the Employees Provident Fund (EPF) have been buying shares of Hartalega Holdings Bhd, whose shares are down by about a quarter year-to-date to RM8.98 yesterday.

The provident fund now owns 7.41% in the glove maker, up from 6% it held early in the year.

Likewise, the fund has also been seen picking up shares of Kossan Rubber Industries Bhd, bringing its stake in the company to 9.13% as at end-March.

Its share price was last done at RM3.24 or down by 26% since the start of the year.

On the other hand, the fund has mostly been disposing of shares in Top Glove Corp Bhd where sentiment has been hit by the forced labour issue it is facing in the US, which raises concern on the glove maker’s prospects, going forward.

Shares of Top Glove had slid to RM4.45 this week before closing at RM4.75 yesterday. Its share price has fallen over 40% since the peak recorded in October 2020.

Kenaga Research’s Raymond Choo says that glove stocks under the firm’s coverage are currently trading at unwarranted 6x-10x calendar year 2022 price earnings ratio (PERs) and offering dividend yield of 6%-8%.

He believes that the share price retracement over the past few months have priced-in weakness in ASP trend moving into the second half of the year (2H21).

He adds while the latest reported results of Top Glove suggest that the ASP trend is expected to soften in subsequent quarters, albeit at a slow pace, demand is still robust.

“However, we do not expect ASP to fall off a cliff despite average lead time being reduced from 300 days in early January 2021 to 200 days currently (compared to 20-30 days before Covid-19), supported by post-pandemic demand growth averaging 15%-20% per annum, ” he says in a report yesterday.

The lower lead time, according to Kenanga Research could be attributed to a gradual supply ramp-up in the market place following a gradual expansion in the second half of last year after the oversupply situation in 2019 discouraged players from expanding aggressively.

On gloves’ ASP, the research firm has conservatively assumed an ASP of US$40-46 per one thousand pieces for 2022.

From the perspective of a long-term investor, it says there is still significant value to be derived from Malaysian glove players which command 65-68% of global market share.

Moreover, it notes that local glove makers have consistently evolved and innovated in terms of product offerings, capacity expansion and plant modernisation via automation.

“Our target price PER of glove stocks is conservatively at 30% discount to five-year historical forward mean averaging between 15x to 28x with earnings expected to start normalising moving into 2022, ” the research firm says.

Its pick for the sector is Hartalega with a RM17 target price. It says the stock is trading at 9x calendar year 2022 estimated earnings per share based on ASP assumption averaging US$46/1,000 pieces, offering a 9% dividend yield.

MIDF Amanah Investment Bank Bhd analyst Ng Bei Shan says she is still positive on the sector although sentiment is


“We still see demand exceeding supply for this year and next year. We do expect ASP to probably correct, entering next year.

For this year, it seems like prices will continue to go up, at least in the third quarter for some players, ” she said when contacted.

In terms of earnings, it has also not peaked for some players like Hartalega and Kossan because so far their ASP revisions have been lagging peers.

She notes that the glove stocks, even before special dividends, were already paying out 40%-50% net profit and they were attractive even then.

“This is going to be a bumper year, so there is the yield play factor, ” says Ng, who sees demand for gloves continuing post pandemic from sectors beyond healthcare due to the higher public awareness.

In the case of Top Glove, it has committed to a special dividend payout of 20%, bringing its total dividend payout for 2QFY21 to 4QFY21 to 70%.

PublicInvest Research in a March 29 resort says that based on its earnings forecast, Top Glove should pay a total dividend per share of 84.3sen for its financial year ending August 31,2021 (FY21), which would translate to a dividend yield of about 16%.

However, labour issues continue to dampen sentiment on the stock, but analysts say its weak share price performance alongside undemanding valuations has somewhat reflected these negatives.

On its part, Top Glove has been working on ESG-related improvements, including submitting corrective action plans to the US Customs and Border Protection since the issue surfaced in the middle of last year.

Total sales to the US provided roughly about 22% of its total group sales.

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