This article first appeared in The Edge Financial Daily on December 18, 2017

KUALA LUMPUR: Investors who bought into the defensiveness and growth prospects of the glove sector this year are likely to be pleased with their investments as most glove stocks have outperformed the broader market.

An investor who had invested RM1,000 each at the beginning of the year in Hartalega Holdings Bhd, Top Glove Corp Bhd, Kossan Rubber Industries Bhd, Supermax Corp Bhd, Comfort Glove Bhd and Rubberex Corp (M) Bhd would have seen a return of 33.4% or RM2,001.52 on their investments to RM8,001.52.

That’s thrice the amount of investments in the 30 component stocks in FBM KLCI would give, which has produced returns of about 10% in the same period.

The rally in glove counters is a reflection of improved operating environment for rubber glove manufacturers this year as competitive pressures that plagued their industry in 2016 moderated.

In the first half of 2017, overall exports of Malaysia’s rubber gloves grew about 11.6% year-on-year, driven by both the growth of nitrile butadiene rubber gloves and natural latex rubber gloves, which rose 27.3% and 1.7% respectively.

The prevailing shortage of vinyl gloves in China due to the crackdown on pollution had led to the permanent or temporary closure of plants, a situation which has contributed to the export growth seen here.

For Malaysia’s glove makers, demand is still mostly for medical gloves, with examination gloves accounting for 90.1% of exports during the first half of this year, while surgical gloves made up 2.3%.

The heavy medical glove component has led analysts to view the glove sector as a proxy to the defensive nature of the healthcare industry.

The Malaysian Rubber Glove Manufacturers Association (Margma) has said that demand growth for rubber gloves remained strong, projecting that global rubber glove demand would grow by 8% to 10% a year.

And the good times seem set to continue, with more analysts tracking the top four glove companies in the country rating them a “buy” than a “sell”. However, most are maintaining a “hold” rating, taking a wait-and-see position to see where the sector will go. However, many agree that a growing and ageing population globally with heightened healthcare regulations, reforms and rising healthcare awareness continues to support global demand for rubber gloves.

Affin Hwang Investment Bank analyst Ng Chi Hoong has an “overweight” rating on the glove sector, saying the upside has yet to be fully priced in.

“Earnings growth for the sector will likely remain robust in 2018, driven by its organic expansion and better margins as the shortage of gloves will continue to benefit rubber glove manufacturers and be the main catalyst for share price rerating in 2018,” he told The Edge Financial Daily via email.

“Glove manufacturers are also becoming more rational in their expansion strategy, which is why we believe that the pricing power will favour the manufacturers for another year,” Ng added.

Top Glove is Affin Hwang’s top pick in the glove sector.

Similarly, CIMB Equity Research is maintaining its “overweight” recommendation on the glove sector.

In its report dated Nov 30, its analyst Walter Aw said glove makers are likely to adjust their average selling prices (ASPs) higher to pass on the bulk, if not all, of the cost increases.

“Kossan remains our top pick for the sector as it is a laggard versus its peers such as Top Glove and Hartalega. Moreover, we expect Kossan’s earnings to improve from the fourth quarter ending Dec 31, 2017, on the back of substantial increase (13.6%) in its production capacity,” he said.

Aw has a “buy” call on Hartalega, with a target price (TP) of RM9, Top Glove (TP: RM6.90) and Kossan (TP: RM9.80).

Aw’s view on the ability to adjust the ASPs higher was also echoed in the Dec 4 statement by Margma that they would raise prices by between US$1 (RM4.08) and US$1.50 per 1,000 pieces of gloves, following the hike in energy costs as well as higher raw material and production costs. At the same time, it revealed 2017 would book a record revenue of RM16.2 billion on strong demand.

Still, not all analysts are bullish on the glove sector for 2018. In its report dated Nov 30, Public Investment Bank Bhd said while the impact on glove players’ earnings from the effect of the change in tariff is likely to be minimal, they would continue to face continuous cost pressures.

AmInvestment Bank analyst Joshua Ng concurred, noting that the market has fully priced in the sector’s strong fundamentals at current historical high valuations.

This was despite his view of a bright prospect for the sector, underpinned by the expanding healthcare sector globally, both public and private, as well as the rising hygiene standards across the industries that drive the demand for gloves over the long term.

TA Securities analyst Wilson Loo also believes that the sector’s growth and defensive qualities are intact. However, he is maintaining his “underweight” call on the rubber sector.

“We opine that valuations of most stocks under our coverage are rich at current levels, having already priced in the sector’s near-term growth prospects,” he said.