KUALA LUMPUR (Oct 21): MIDF Research has upgraded its rating of the glove sector to "positive", from "neutral", saying the sector is deemed defensive and at the moment recession-proof.
According to MIDF analyst Ng Bei Shan in a sector update today, the market capitalisation (market cap) of Supermax Corp Bhd and Kossan Rubber Industries Bhd have stayed above the RM20 billion mark.
““As such, they are likely to be included as [FTSE Bursa Malaysia] Kuala Lumpur Composite Index (FBM KLCI) component stocks in the upcoming FTSE review in December.
“If and should the two stocks be included, the weightage of glove counters on the KLCI may possibly be increased to 30% to 40% from about 15% currently based on the latest market caps of the top four glove companies listed on Bursa,” she said.
Ng said the glove makers are deemed to still be in their business upcycles as their earnings are still expected to grow significantly for a few quarters.
“Looking beyond the near-term surge in profit, we expect that growth will be driven by organic growth in demand due to higher hygiene awareness, production capacity, product innovation and improvement in production processes,” she said.
The growth is also likely to be supported by a higher allocation in the government's annual Budget for personal protective equipment (PPE) by government agencies and health departments, she added.
Based on channel checks, supply for medical gloves remains tight and average selling prices (ASPs) are still in an upward trajectory after the jump seen earlier in the first half of the year (1H20), said Ng.
“Ex-factory prices are expected to have grown by 30% to 40% in the third quarter of 2020 (3Q20), compared to the second quarter of 2020. Following that, there may be another increase of 40% to 50% in the fourth quarter of 2020.
“As such, the glove makers are likely to beat their own records seen in the last quarter in the upcoming two quarters,” she said.
She also expects that ASPs are likely to remain high in financial year 2021 (FY21) based on a base-case scenario of vaccine availability in mid-2021, and the administration of vaccines will also require the usage of gloves.
“We believe that demand for gloves will remain high in 2022 due to organic growth of the industry, coupled with higher hygiene awareness,” she said.
She said that given the Covid-19 pandemic, demand for rubber gloves is expected to grow at a pace of over 20% from about 10% previously.
Besides, lead time for nitrile rubber gloves has continued to increase quarter-on-quarter (q-o-q), with some manufacturers seeing lead time increasing to more than 400 days, compared with 30 days to 40 days previously.
Ng highlighted that the long waiting time implied that demand for rubber gloves remains strong.
“As current supply is for immediate usage, industry players expect another six to eight months for their customers to build up their inventories, which may imply that the supply deficit may last for two years.
“As such, ASPs are likely to remain high and unlikely to revert to pre-pandemic levels at least in the next two years,” she said.
Ng also believes that it is still too early to conclude that the discovery of a vaccine could negatively impact ASPs of gloves as she opined that demand for gloves should remain high due to the mass administration of the vaccination required.
On remediation fees for foreign workers, Ng said that its impact on the companies’ bottom line is estimated to be less than 1%.
“While this ongoing issue may cast negative publicity on the glove companies, they have been taking proactive measures to address them since last year.
“As the payment will be one-off, it should not have a negative impact on the companies in the long run,” she said.
She also does not think new players entering the fray would have a significant impact on the industry.
“As new entrants are likely to start off small in the first two years of their establishment, they are expected to contribute to less than 5% of total production in Malaysia in 2021,” she said.
Following the latest updates, Ng revised up Top Glove Corp Bhd’s earnings forecasts by 55%/73%/40% for FY21/FY22/FY23, while earnings estimates for Hartalega Holdings Bhd were revised by 66%/56% for FY21/FY22.
Similarly, earnings estimates for Supermax were adjusted by 34.8%/81.4%/75.2% for FY21/FY22/FY23, while earnings forecasts for Kossan were revised by 31%/90%/49% for FY20/FY21/FY22.
Ng also said the operating cash flow of the glove companies under MIDF’s coverage had grown by three to six times year-on-year (y-o-y) in the last quarter, and the companies are also in a net cash position now.
“This has also reduced finance cost for the glove companies, and with the additional cash in hand, they would be able to speed up their expansion plans or to bring forward some of the future production capacity that they have already planned for even before the pandemic started,” she said.
In addition, the companies under her coverage have been paying at least 30% of their profit.
Based on her estimates, dividend yields for Top Glove would be 5.1%/2.3% for FY21/FY22. Meanwhile, dividend yields for Hartalega are expected to be 2.1%/1.9% for FY21/FY22, followed by Kossan at 2.2%/1.4% for FY21/FY22 and Supermax at 3.1%/3%.
“We opine that the dividend yields are considerably decent in a low interest rate environment, and the strong cash flow can help the companies fulfil their dividend policies with ease. Furthermore, any potential special dividends may further boost the appeal of the estimated dividend yields,” Ng said.
She maintained "buy" for Top Glove and Supermax, with higher respective target prices (TPs) of RM10.96 (previously RM9.63) and RM13.83 (previously RM12.43).
She also upgraded her ratings of Hartalega and Kossan to "buy" from "neutral", with higher respective TPs of RM22.96 (previously RM20.73) and RM10.02 (previously RM7.68).
Gloves makers’ rally halted today as investors took profit on the stocks. At 10.32am, Top Glove had fallen 35 sen to RM9.13, Supermax dropped by 49 sen to RM9.87, Hartalega slipped 10 sen to RM18.94 and Kossan decreased by 30 sen to RM7.83.