Glove manufacturers could continue hot streak

This article first appeared in The Edge Malaysia Weekly, on November 12, 2018 - November 18, 2018.
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INVESTORS who baulked at buying glove stocks at the end of last year, because they believed valuations were too stretched, could be kicking themselves given that the share prices of the four largest glove manufacturers have outperformed the market by a long shot.

The average share price gain of Harta­lega Holdings Bhd, Top Glove Corp Bhd, Kossan Rubber Industries Bhd and Supermax Corp Bhd over the past year has been a whopping 65.2%. The returns are all the more monumental given that the FBM KLCI inched up a measly 2.2% over the same period.

While sceptics may point — yet again — to high valuations as a deterrent to investing in glove makers, the companies continue to outperform, be it in earnings or share price performance.

Take Supermax, for instance. In its first fiscal quarter ended Sept 30, net profit improved by 29% to RM36 million on the back of revenue growth of 17.6% to RM367.1 million compared with the same period a year ago.

Affin Hwang Investment Bank analyst Ng Chi Hoong believes the glove manufacturer — previously weighed down by some shareholder turmoil — is back on track to achieve year-on-year profit growth on the back of incremental capacity growth of 3% to 5%, or 1.35 billion gloves, as its rebuilt plant in Perak became fully operational at the end of September.

“We believe the new plant will not only generate revenue growth but also some margin expansion as it is more efficient than the previous plants. The overall capacity target remains unchanged at 29 billion pieces in mid-2020 from the current 24 billion pieces,” Ng says in a Nov 2 report. His target price of RM4.60 is based on 21 times price-earnings to 2019 calendar year forecast earnings.

CIMB Investment Bank analyst Walter Aw concurs with Ng, and has upgraded his target price to RM4.47 from RM3.84. In his latest report on Nov 1, Aw says, “We believe Supermax’s risk-reward profile is appealing as it is trading at a 45% discount to the sector’s 2019 calendar year price-earnings.”

Supermax’s strong earnings are reflective of those of the industry, where the top four players have enjoyed an average revenue expansion of 16.5% over the last two financial years.

Hartalega, which announced its results last Thursday, posted a revenue and net profit improvement of 22.2% and 6.1% to RM714.2 million and RM120.2 million respectively from the corresponding period a year ago.

Kossan Rubber is scheduled to release its third-quarter earnings this month.

Although it is arguably too early to state with any certainty if the companies can maintain their strong share price and earnings momentum, the industry expects further market share gains amid capacity expansion, supported by robust global demand.

According to a forecast by the Malaysian Rubber Glove Manufacturers Association (MARGMA), local glove companies will supply 63%, or 168.8 billion units, of global consumption by the end of the year. The association also expects the sector to see a double-digit growth rate of about 15% over the next few years.

Even though the sector’s earnings growth remains robust, Rakuten Trade Sdn Bhd head of research Kenny Yee says company valuations are not cheap when compared with the market.

“If you look at their earnings, most of the glove counters have recorded double-digit revenue growth over the last few years. With demand still expected to be strong, their earnings growth could be sustained. Nonetheless, while their fundamentals are strong, they are also not cheap.”


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