SINGAPORE (July 7): Malaysia-based AmInvestment Bank (AmBank) is reiterating its “overweight” stance on the glove sector, following the high demand for the personal protective gear.
Glove manufacturers are feeling the pressure from the surge in orders, with some saying their order pipeline extends to 1Q21.
Malaysia-based producer Top Glove for one says its delivery lead time spanned 400 days in 3QFY2020 ended May, compared to the 40-day time frame it previously adhered to. Fellow Malaysia-based producer Riverstone Holdings faces the same dilemma and says it is fully booked till March 2021.
These high orders have bode well for Malaysia’s glove producers who are among the world’s top exporters. Between Jan – April 2020, total rubber exports grew 21.4% year-on-year to RM6,868 billion ($2,237.9 billion). Analysts expect this number to increase over the next few months.
“We believe that selling prices will continue to soar in the next six months as lead time [for the receipt of gloves] stretches up to 12 months,” AmBank analyst Nafisah Azmi says in a July 7 note.
“The glove companies’ earnings will be further boosted by expanded margins as raw material prices remain low, selling prices continue to grow, USD continues to strengthen over the Malaysian Ringgit and expansion plans remain intact for the glove producers,” she adds.
In this time, she expects sales volume and average selling prices (ASP) to grow exponentially. Already, ASPs are trending upwards by 5-15% quarter-on-quarter, while spot selling prices have skyrocketed 100 – 400% in the past few months due to panic buying of gloves.
Azmi predicts ASPs will only inch down in 2022F – assuming the Covid-19 pandemic has abated – due to lower urgency of orders.
Even so, she says there may be a structural change in the way gloves are used as the world looks to becoming more hygienic.
This is expected to affect the healthcare sector as well as other industries such as food and beverage, thereby keeping demand for the personal protective gear intact.
As such, Azmi is maintaining her ‘buy’ call on Top Glove, at a higher target price of RM25.69 ($8.37) (price traded on Bursa).
“Our valuation is based on 33x Calendar Year 21F EPS. We assume an FY21F ASP of US$35 (previously US$29) as we believe the higher selling prices will sustain for another year before falling post-Covid-19 pandemic,” she asserts.
“We also raise our ASP assumption to US$25 ($34.8) (previously US$24) for FY22F as we expect that a drop in demand growth will be minimized by the structural change in glove usage”.
As at 12.29pm on Tuesday, shares of Top Glove was up 7 sens or 1.077% to RM6.57 on the Singapore Exchange.
