Friday 29 Mar 2024
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KUALA LUMPUR (March 18): Rubber glove manufacturers are expected to record higher margins amid the current Covid-19 outbreak, said CGS-CIMB Research in a note today.

The research house said this will be driven by a 3-5% increase in selling prices, improved economies of scale arising from higher production output, and a more profitable sales mix.

“With strong global glove demand, we believe that glove makers have no choice but to prioritise clients based on pricing and product mix,” it said.

The global demand for rubber gloves has shot passed levels seen during the SARS and H1N1 outbreaks in 2003 and 2009 respectively.

“To put into context, we understand that average lead time for glove makers to fulfil orders has risen up to a minimum of four months versus usually 1-2 months on average. Note that the lead time for rubber gloves during the SARS outbreak was two months and H1N1 (bird flu) outbreak was three months,” the research house said.

Furthermore, their operations will not be disrupted by the current nationwide movement restriction order, which is effective from today until March 31, as the manufacturing of rubber gloves is deemed an essential medical industry by the government.

It added that the current operating environment for the sector is favourable as the ringgit has weakened against the US dollar.

Year-to-date (YTD), the ringgit has fallen by 5.4% against the greenback, which is beneficial for glove makers as over 90% of their sales are denominated in the US dollar.

In addition, the prices of important raw materials have continued to drop amid global uncertainties. For instance, nitrile butadiene prices have declined 4.5% YTD.

Thus, GCS-CIMB is overweight on the sector, despite its premium valuation.

“We have 'add' calls for all four glove stocks, with Top Glove and Kossan as our top picks in the sector,” it said.

The research house added that re-rating catalysts for the sector include stronger-than-expected glove sales, and higher-than-expected margins.

Meanwhile, downside risks include a sharp easing of the coronavirus concerns, and the strengthening of the ringgit against the US dollar.

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