This article first appeared in The Edge Financial Daily on February 4, 2020

Rubber glove sector
Maintain overweight: In an announcement, the World Health Organization has declared the Wuhan virus outbreak in China a global health emergency given concerns over the virus spreading to more countries, especially the ones with weaker health systems.

Thus, we expect higher healthcare awareness on a global basis. This should lead to more countries, including the ones with low healthcare awareness, stocking up on medical supplies, such as medical gloves (an essential item used in the healthcare industry). This should bode well for Malaysian glovemakers which supplied up to 63% of global rubber glove demand in 2018.

Our recent channel checks with glovemakers revealed that there had been a ramp-up in demand for gloves, especially from China and its neighbouring countries. The Malaysian Rubber Glove Manufacturers Association has also highlighted that its members are ramping up their production to meet rising demand for gloves to contain the spread of the virus. This bodes well for long-term glove demand due to the above-mentioned higher healthcare awareness on a global scale.

Based on our current forecasts, we estimate that glovemakers under our coverage should record an average 14% increase in calendar year 2020 revenue (based on the assumption of a rise in global glove demand of 8% to 9%). Note that global medical glove consumption rose by 17% in 2009 during the H1N1 outbreak. We estimate that every 5% increase in the average utilisation rate of each glovemaker (their current utilisation rate stands at 82% to 85%) could lead to a 6.8% to 10.1% upside to our financial year 2020 (FY20) to FY22 earnings per share forecasts, assuming no margin expansion from higher economies of scale and higher average selling prices.

We currently peg all glove stocks under our coverage at +1 standard deviation (SD) above their five-year historical mean. We note that in the past 10 years, glove stocks’ valuations went +2SD above their five-year historical mean during the H1N1 outbreak (2009-2010) and the US dollar/ringgit rally (2005). We stay “overweight” on the glove sector, with Top Glove Corp Bhd and Kossan Rubber Industries Bhd as our top picks. Downside risks include a sharp dissipation of concerns over the Wuhan virus and a stronger ringgit against the US dollar. — CGS-CIMB Research, Jan 31