KUALA LUMPUR (April 29): Shares of glove makers are poised to rise further despite having outperformed the FBM KLCI by 57.8 percentage points year to date, according to Affin Hwang Capital.
The rubber product sector has gained 43.9% in stock-price performance so far this year but the firm suggests that it is “not time yet” to cash in on the stocks.
“Demand for rubber gloves continues to surprise us on the upside, as some manufacturers have locked in orders until the end of 2020,” it said in a note today.
“Apart from the strong demand, the recent decline in oil prices could also lead to lower raw-material prices, which is beneficial to the sector,” the firm added.
Affin Hwang has maintained its “overweight” rating on the sector and “buy” call on Top Glove Corp Bhd and Kossan Rubber Industries Bhd with higher target prices of RM8.70 and RM7 respectively.
According to the research house, demand for rubber gloves continues to grow as more countries are affected by the Covid-19 pandemic.
Although manufacturers have increased their utilisation to above 90%, the firm said it is still insufficient to satisfy the spike in demand.
“This has allowed some manufacturers to lock in sales until the end of 2020, which came as a positive surprise to us, as we had previously assumed that demand would normalise by the third quarter.
“We believe that there is also a high possibility that manufacturers will continue [to] increase the selling price by another 5-8% for the fourth quarter,” it said.
Affin Hwang expects the low oil price to result in lower rubber prices for the next few months, citing a correlation between the price movement of the former and that of latex and nitrile.
It said manufacturers will likely hold on to the margin gain from the lower raw material prices, pointing out that latex and nitrile make up about 40-45% of costs of goods sold.
“Apart from the margin-improving price increases and the drop in raw material prices, the weakening of the ringgit could be another positive catalyst for the sector, as close to 100% of its sales are in US dollar.
“As the vaccine for Covid-19 is still being developed, demand for personal protective equipment, like gloves, will continue to sustain. We are also revising our estimated earnings growth for the sector to increase by 21.5% from 15.6% for this year,” said the firm.
Affin Hwang has maintained its “hold” call on Hartalega Holdings Bhd and Supermax Corp Bhd with higher target prices of RM7.70 and RM2.20 respectively.
http://www.theedgemarkets.com/article/glove-makers-shares-poised-trend-higher-%E2%80%94-affin-hwang
