Rubber glove sector
Maintain overweight: With the lacklustre demand in the past 12 months behind us, we see restocking activities ramping up as the current outbreak of the Wuhan virus enforces higher hygiene standards. All in, we raised our valuations from +one standard deviation (SD) to +1.5SD to better reflect rubber glove players’ prospects in anticipation of restocking activities, resilient earnings and constant evolution and progress to increase earnings. Based on historical valuation at peak earnings, rubber glove stocks, namely Kossan Rubber Industries Bhd, Hartalega Holdings Bhd and Top Glove Corp Bhd, were trading at between +1.5SD to +2.0SD historical forward mean.
We believe rubber glove stocks deserve further rerating and should trade at their previous peak price-earnings ratio valuations given the following factors including restocking activity ramp-up as the current Wuhan virus outbreak enforces higher hygiene standards, uptick in average selling prices (ASPs) as most players are running at high utilisation rates of 80% to 90% since most players have cut back on production following concerns of oversupply in 2019, and also margin expansion emanating from higher ASPs since players have scaled back and slowed down on expansion in 2019.
Telltale signs of demand outstripping supply could potentially lead to higher ASPs. Looking at the stable raw material price, ceteris paribus, any hike in ASPs is expected to lead to margin expansion. We understand that some players have raised prices in anticipation of higher demand and we also noted the current high 90% utilisation rate for nitrile-centric players, a stark contrast to the lacklustre demand in 2019. Based on our analysis, we expect nitrile gloves to continue growing and expropriating market share from latex gloves. The growth in the nitrile segment is evident. For illustration purposes, going forward, assuming nitrile:latex breakdown of 80:20 (current is 67:37) and based on estimated global demand of 308 billion pieces in 2020 (forecast for 2019 is 300 billion pieces and assuming 8% growth rate in 2020), this implies nitrile growth rate of 30% or an additional 51 billion pieces from switching to nitrile gloves.
We have “outperform” call on Hartalega (target price [TP]: RM7; previously RM6.50); Kossan (TP: RM5.90) Supermax Corp Bhd (TP: RM2.00; previously RM1.75) and Top Glove (TP: RM5.30; previously RM4.25). Our top pick in the sector is Hartalega. We upgraded Top Glove to “market perform” as we raised our target price from RM4.25 to RM5.30.
Nascent signs of a solid uptick in demand are emerging for rubber gloves, driving subsequent quarters and benefitting the players. The third quarter of calendar year 2019 (3Q19) results season indicated a positive recovery in demand and hence volume growth for industry leaders Top Glove and Hartalega, which recorded 6% and 14% sequential volume growth, respectively. Hartalega’s 2Q20 bottom line achieved a second consecutive sequential quarter-on-quarter growth. Separately, Top Glove showed a solid recovery in earnings underpinned by 6% volume growth attributed to nitrile segment (+12%) but reported lower latex segment. — Kenanga Research, Feb 7
http://www.theedgemarkets.com/article/demand-surge-seen-boost-glovemakers-earnings
