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Should retail investors still believe in the glove sector?

THE last few months have been awfully brutal for the glove sector, regardless of which glove stock you’re looking at.

If one who has not been investing in the stock market for some time, switches on the screen, seeing how the glove stocks have been pummelled, he or she would think that something terrible has happened to the industry.

For a selloff of this magnitude, it may appear as though glove companies are reporting massive losses, the government imposed windfall tax on the sector or the United States are banning the entire Malaysia glove imports altogether.

However, this is not the case at all. None of the hypothetical “worst case scenario” has happened. What happened though is a slew of downgrades by research houses on the sector as they did a half-year sector report for the second half of the financial year 2021. You can see a simple Table compiled by a few research houses as below.

Majority of the research houses have downgraded the sector entirely and slashed the target price. Even those that are still overweight, which are in the minority (Hong Leong Research and Kenanga Research only), reduced their target price as well. What does this tell you? To the analysts and possibly their clients which they are servicing (fund managers), the glove theme is over. This is in spite of the Delta variant raging globally, ASP decline in the second half of 2021 which was already factored in (mentioned in their 2020 reports) or that now with the enhanced movement control order, glove factories cannot operate, hence worsening the shortage in global glove supply.

Until today, most of the glove companies have continued to exceed analysts’ forecasted earnings performance. Despite beating their report consensus by a mile, the outcome by the analysts were still a downgrade. It is bewildering to market observers and even more so to retail investors.

In fact, I don’t blame the analysts because what they are doing is part of their job challenges which includes a 12-month time horizons, annual key performance index and bonus assessment, clients feedback or possibly pressure from higher ups. They are not long term in nature similar to many fund managers who are looking at it short term. So when I see some of the analysts changing valuation methods mid-way, or extending their forecast horizon to the financial year 2023 or 2024, it doesn’t surprise me anymore. The end justifies the means. People will do whatever is necessary to find reasons to justify an outcome which they want to see. It is human nature.

Ng Zhu Hann - Tradeview
Ng Zhu Hann - Tradeview

Interestingly, I had the opportunity to speak with some of the largest foreign fund managers in the past month, and they highlighted to me two companies in the US as examples to show why Malaysia’s glove companies should be given more appreciation.

> Owen & Minors share price performance continue to hold steady and register record highs despite US doing well in controlling the Covid-19 pandemic. This is in line with their earnings performance.

> Medline Industries Inc, one of the largest privately owned medical healthcare distributor in US (which also happens to be the key clients of many glove makers in Malaysia) recent blockbuster US$34bil (RM140bil) acquisition by a consortium of the largest private equity funds consisting of Blackstone Inc, Carlyle Group, Hellman & Friedman LLC and GIC Singapore.

Their feedback was, if investors are able conduct a valuation objectively, taking into consideration peer comparison, as well as intrinsic value of the company measuring the retained earnings, balance sheet and cash flow, they would know that the glove companies of Malaysia today is undervalued, regardless of the near term sentiment.To be fair, I have always liked glove companies even before Covid-19. Although I like glove stocks, I did not imagine how explosive their earnings potential would be. At times, I feel this is a tough sector due to the intense competition within the industry. Yet, I like the management of glove companies (the glove sector have some of the best entrepreneurs in our country) and it is a sector in which Malaysia has an undisputed leadership position in the world with over 67% market share.

Throughout 2020 during the hype of glove stocks, glove companies were the darlings of investors especially retail investors. Many chased the stocks on the way up and many were caught on the way down when foreign funds and local institutions exited. After the sell down, most, if not all glove stocks, are net cash as at July 9 and you can look at the Table below to have a better picture:

When the glove stocks sell off exacerbated, first by foreign funds followed by local institutions, one brilliant local fund manager raised this point to me to indicate how the sector is undervalued.

The cash position and accumulated income of glove companies will only keep growing in the years to come even if ASP decline gradually in the future. This is because even at US$25 per carton pre-Covid-19, the major glove companies were profitable.

This means if the share price remains stagnant at this level, the market cap do not increase in tandem (share price does not move up in tandem with earnings), then sooner or later the percentage of cash will become 100% of the market cap. Of course, realistically this should not happen as share price logically moves with earnings. So for those, especially retail investors who are worried that glove stocks share price will keep plummeting, well it will only happen if it starts making continuous losses in the coming quarters in the future.

Glove retail cht
Glove retail cht

If that is what you fear and think will happen, it is better not to invest in glove stocks. If you think that won’t happen, then you have nothing to fear.

Ultimately, whether to invest in glove companies or any companies for that matter, one should believe in the fundamentals and the long term horizon and not follow the herd mentality. It is best to have faith in the reported numbers you see every quarter and the management of the company you invest in. They are the ones that will grow your wealth as a shareholder, news articles or reports won’t.

I am an optimist by nature so I tend to look at things with a more positive bias. I have learnt over the years that sometimes when the share price is plummeting, all the negative news flow seem to come at once. Vice-versa when investing, do not take everything at face value and try your best to remain level headed. Only in that way you can sustain for a longer journey.

Ng Zhu Hann, is the author of Once Upon A Time In Bursa. He is a lawyer and former chief strategist of a Fortune 500 Corporation. The views expressed here are his own.


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