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Sector Of The Year: The collapse of glove stocks

SINCE reaching their all-time highs in August 2020, the share prices of glove stocks have been on a decline, despite a resurgence of Covid-19 cases and the spread of new variants globally in 2021.

Year to date, Supermax Corp Bhd has seen nearly 77% of its market value wiped off, making it the worst-performing glove stock among the Big Four. Top Glove Corp Bhd’s market cap has been slashed by two-thirds, while Kossan Rubber Industries Bhd and Hartalega Holdings Bhd have lost 62% and 58% of their market value respectively.

This was on the back of the ramped up vaccination drive, falling average selling prices (ASPs) of gloves and incoming production capacity in the glove industry.

Bursa Malaysia’s Healthcare Index is down 38.8% since early this year after posting a jump of 185.6% in 2020.

As a result of heavy selling pressure, the valuations of glove stocks have touched record lows since the pandemic began. Kossan is trading at its lowest forward 12-month price-earnings ratio (PER) of 1.41 times, against Supermax’s 3.16 times, Hartalega’s 4.95 times and Top Glove’s 16.06 times. This is in stark contrast to their historical highs of more than 50 times at the height of the pandemic in 2020.

Analysts have advised investors to lighten their position in glove stocks. For instance, of the 24 research houses that track Top Glove, there are 12 “sell” recommendations, 10 “hold” and two “buy”. The consensus target price is only RM2.21, representing an upside of only 2.3% against its closing price of RM2.16 on Dec 17.

Last month, JP Morgan even warned that the market had underestimated the potential impact of the bottoming ASPs and the shift in pricing power back to the buyers.

In the latest quarterly results ended Nov 30, 2021, Top Glove — the world’s largest glove maker — saw its net profit tumble 69.45% to RM185.72 million from RM607.95 million in the immediate preceding quarter, on the back of declining glove ASPs and higher operating costs.

Despite the emergence of new Covid-19 variants such as Delta and Omicron, the buying interest in glove stocks was short-lived during the year. That said, the lingering risk from a potential spike in cases is expected to slow the fall in ASPs.

An estimated global shortfall of 80 billion glove pieces is expected in 2021 — in anticipation of world demand of 500 billion pieces versus 420 million pieces produced. Malaysian players contribute about 67% to the global glove output.

Competition from other glove-producing countries, especially China, is a threat to the local players over the long run in the face of glove production being ramped up in the world’s second largest economy. China is estimated to account for 10% of the global glove supply.

In addition, a few glove makers were plagued by labour issues. Last March, the US Customs and Border Protection (CBP) directed personnel at all US ports of entry to begin seizing disposable gloves produced in Malaysia by Top Glove. This came after its two subsidiaries, namely Top Glove Sdn Bhd and TG Medical Sdn Bhd, were placed under detention order by the CBP in July 2020 over allegations of forced labour. Last September, Top Glove was cleared to resume exporting and selling gloves to the US.

A month later, Supermax became the subject of alleged forced labour, resulting in the detention of its disposable gloves at all US ports of entry. The glove player has said it would divert goods bound for the US to other markets where possible.

Top Glove’s decision to spend more than RM1 billion on a share buyback exercise — between September 2020 and February 2021 — also came under scrutiny as the money could have been better utilised for business expansion rather than supporting its falling share price. The company’s market value had shed 73% from about RM60 billion in mid-September 2020 to RM16.33 billion on Dec 17, 2021.

Nonetheless, glove stocks have emerged as favourite picks of investors who seek high-yielding stocks, with Hartalega offering the highest dividend yield of 16.23%, followed by Top Glove (11.57%), Kossan (7.19%) and Supermax (3.85%).

Top Glove received shareholders’ approval this month for its proposed listing exercise in Hong Kong. Last October, it slashed the amount it planned to raise from its initial public offering for the second time to RM2.21 billion — about half of the first revision of RM4.17 billion in April. The initial plan, announced early this year, was to raise RM7.7 billion.

Supermax, meanwhile, has put its planned dual listing on the Singapore Exchange on hold as market sentiment has turned sour for the glove maker.

While a weaker financial performance is expected ahead for the glove industry, owing to the normalisation of ASPs and lower sales volumes, analysts highlight that the emergence of new Covid-19 variants may help slow the drop in ASPs, before an equilibrium is reached between supply and demand — likely in two to three years’ time.


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