Investors book profits on rubber glove stocks after rise to all-time highs

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 KUALA LUMPUR (April 22): Investors were seen to be booking profits on rubber glove stocks yesterday, following spikes in these counters to multi-year highs amid the Covid-19 outbreak, which drove the demand for rubber gloves.

The Bursa Malaysia Healthcare Index declined 2.4% yesterday to settle at 1,368.99 points, from 1,402.45 points the previous day, likely dragged by the declines among the rubber glove stocks.

Year-to-date (YTD), however, the index is still up by 9.5%.

Among the big four rubber glove stocks, the counter that declined the most by percentage was Hartalega Holdings Bhd, which fell 5.47% to close at RM7.25 for a market capitalisation of RMRM24.53 billion.

The second biggest decliner was Top Glove Corp Bhd, which fell 3.8% to close at RM6.50, followed by Kossan Rubber Industries Bhd, which fell 2.9% to RM5.34.

Meanwhile, Supermax Corp Bhd closed higher yesterday, up 3.09% at RM2.

The selldown on Hartalega followed a derating by Public Investment Bank Bhd analyst Chua Siu Li, who had downgraded the stock to “neutral” from “outperform”, as the positives for the stock have been largely priced in by the market.

In a note yesterday, the analyst said the research house is still optimistic over the company’s prospects in the near term due to the surge in demand for gloves.

“Following the outbreak of Covid-19 in China in late January, we upgraded our call on Hartalega to ‘outperform’ as we were of [the] view that the situation could worsen and benefit the glove makers. Hartalega’s share price has since rallied over 40%.

“While we are still optimistic over Hartalega’s prospects in the near term due to the surge in demand for gloves, we believe that the positives have been largely priced-in, as Hartalega has never traded beyond two standard deviations during the good times in the past,” said Chua.

JP Morgan also downgraded its call on Hartalega to “neutral”, given the less favourable risk-to-reward ratio following the counter’s rise YTD.

“For Hartalega, our revised December 2020 target price of RM8.60 suggests only 12% upside potential remains. After the 30% share price rally since late January (outperforming the KLCI by 46%), we are booking profits by downgrading to ‘neutral’,” it said.

JP Morgan prefers Top Glove for exposure to the rubber glove sector, which it said offers 21% upside potential to its revised target price of RM8.20, supported by a shift in product mix to more nitrile gloves which would support margins, and improvements at Aspion.

On the other hand, RHB Research Sdn Bhd maintained “buy” on Kossan Rubber Industries Bhd with a higher target price of RM6.50, from RM5.70 previously, in line with an increase in its earnings forecast for the company.

The analyst said the better earnings will be driven by an increase in average selling prices, due to the shortage of rubber gloves worldwide, with room for further increases.

RHB Research analyst Alan Lim said the counter is undervalued and that Kossan remains attractive, valuation-wise.

“In a recent teleconference, Kossan said gloves demand had surged since February due to Covid-19. During this month, orders surged from China. From March, other countries — including the US and Europe — also increased orders. 

“Due to the exceptionally high demand, Kossan’s orders are secured up to September. Its utilisation rate is now almost full at around 90% to 95% vis-à-vis normal levels of around 80% to 85% before Covid-19,” said Lim.

He expects Kossan to report a strong set of results for the first quarter of 2020, supported by higher sales volume, better foreign exchange rates and lower raw material prices.