SINGAPORE (Apr 3): Personal protective gear has become today’s hottest commodity. Face mask and glove makers are struggling to meet the surge in demand from both hospitals and consumers alike. As the Covid-19 outbreak spreads, the World Health Organization (WHO) on March 27 warned that the “chronic global shortage of personal protective gear is among the most urgent threats to virus-containment efforts”.
The Malaysian Glove Manufacturers’ Association (MARGMA) has raised its 2020 forecast for global medical gloves demand from 300 billion to 345 billion, which will be an increase of 16% over 2019.
Three Malaysia-based glove makers with Singapore listings, Top Glove, Riverstone Holdings and UG Healthcare are valiantly trying to meet the surge in demand amid restrictions from Malaysia’s Movement Control Order (MCO) which limits employees on site to 50%. Despite this, the trio have expanded their production levels through higher factory utilisation.
Top Glove — which produces one in five gloves globally — increased its factory utilisation by 10% to 95% in March. It is now making 200 million natural and synthetic rubber gloves in a day. With incoming orders more than double its current production capacity, executive chairman Lim Wee Chai says the company is adding new machines weekly and is looking to hit near-maximum factory utilisation this month.
“Sales orders [from March 16 to 23] surged 163% to 2.94 billion pieces compared with 1.12 billion pieces during normal time,” Lim noted in an earnings briefing on March 26. This translates to a weekly sales average of 2.44 billion pieces sold between Feb 3 and March 23. At the initial stage of the outbreak, sales orders came mainly from China, Hong Kong, Singapore and South Korea. “In recent weeks we’ve received strong sales orders from Europe, US and other countries,” observes Lim. As such, he is looking at an order book of 15.80 billion gloves for the current quarter, with an increase in average sales prices between 3.5% to 5%.
Even with production numbers up, there is “definitely” still a shortage, as some customers ‘panic order’, says Lim. Instead of a normal order of 10 containers a month, they now want to buy 20 containers. Yet, this, 100% surge in orders is only met with a 20% increase in supply, he points out.
Lim’s sentiments resonate with Wong Teek Son, executive chairman and CEO of Riverstone Holdings. Similarly, even with a utilisation rate of 90% to 93%, he says the company still could not meet the heightened demand. “We had to reject some orders from new clients as priority is being given to existing ones,” says Wong, adding that orders placed in March will only reach end users in October.
Riverstone claims a market share of 60% in supplying Class 10 and Class 100 gloves, which are used primarily for high tech manufacturing operations. It was only in the last decade that it ventured into the healthcare glove segment in a bid to balance the cyclically-sensitive, higher margin-yielding cleanroom segment with the lower margin and lower-yielding healthcare segment, says Wong. Riverstone can make 25 million gloves a day at full capacity. Last year, the company made 8 billion gloves — 85% of which was for the healthcare sector. In recent times, it has built up the capacity to make 50,000 face masks a day.
“Fortunately we have been adopting automation over the last few years to reduce our reliance on labour,” says Wong. As such, he has been able to keep prices at the same level as he copes with the higher orders. The company is likely to improve its gross margins by 13% to 15%, as it ekes out better operating efficiency with the higher volume, says Wong.
Just like its peers, UG Healthcare has been experiencing an “overwhelming demand” for its gloves and ancillary healthcare supplies. “Most of the time we are serving long-term customers, so we [receive] a certain ordering pattern,” says Lee Jun Yih, the company’s executive director. “Our capacity is limited by what we have [and] we don’t have a lot of free capacity that is ready, lying idle for this kind of situation. We have to manage the increase very carefully”.
Known for its Uniglove brand, UG Healthcare specialises in both healthcare and cleanroom gloves as well as face masks and other medical disposables. With an annual production capacity of 2.9 billion gloves, Lee notes the company is already operating at near maximum capacity. Even so, it plans to further expand this through an upgrade to production lines by this June.
Heightened interest
Indeed, savvy investors have been quick to scoop up shares of the three counters. On Jan 28, when the Covid-19 outbreak turned serious, trading interest in these three stocks surged. Top Glove had added 55 cents or 28.9% at $2.45, with 831,800 shares changing hands. Riverstone Holdings was up 18 cents or 17.6% at $1.20, with 4.8 million shares traded. Meanwhile, UG Healthcare gained 8 cents or 51.6%, with 7.1 million shares added. RHB analyst Jarick Seet says higher demand allows manufacturers to increase prices and margins, and with that the prospects of higher earnings.
Since then, the counters have continued their ascent. The trio now has a combined market value of more than $6 billion, giving them an average total return of 29.9%. On April 2, shares in Top Glove closed flat at $2.11, which gives it a historical P/E of 49.5 and a market cap of $5.32 billion; Riverstone closed at $1.00, which gives a P/E of 23 and market cap of $742.5 million; UG Healthcare closed at 19.9 cents on April 2, giving it a historical P/E of 19 and market value of $39.0 million.
“Across the board, industries are not performing well because operations and supply chains are being dragged down by the coronavirus. The only counters doing well are these glove manufacturers because they have higher profits following an exponential increase in their order book,” observes Wayne Lee, chairman and CEO of investment advisory firm W Capital.
However, when UG Healthcare reported its 1HFY2020 numbers last month, revenue increased 28.5% to $53.2 million but earnings dropped by 35.9% to $846,000 as the company stepped up in its marketing efforts. Instead of being a contract manufacturer for other brands, UG Healthcare is actively building its own brand of gloves. “Management said that demand for healthcare gloves has surged, while 1HFY20 earnings were unexciting, earnings are seen to improve sharply, going forward,” says RHB analyst Leng Seng Choon who has a ‘buy’ call at a target price of 33 cents on UG Healthcare.
No dividend was announced, as the board is looking to “conserve cash for expansion and growth”. As at Dec 31, 2019, cash and cash equivalents stood at $3.3 million, giving it sufficient ammunition to achieve its optimal utilisation level.
Supernormal earnings
Like RHB’s Seet, Maybank Kim Eng analyst Lee Yen Ling likes the glove sector for its expected “supernormal earnings”. The analyst has a “buy” call and target price of RM6.32 ($2.06) for Top Glove. For its 2QFY20 ended February, Top Glove’s earnings increased by 9.3% y-o-y to RM115.7 million. Revenue, in the same period, was up 6% to RM1.23 billion, particularly from its nitrile glove segment.
Top Glove now expects “very solid quarters ahead” amid heightened demand and resultant factory expansion, which will bring its glove factories from the present 34 to 39 by December 2021. This will give Top Glove 861 production lines and a production capacity of 91.1 billion gloves per annum. With cash and cash equivalents of RM854.9 million, the company is in good stead to execute these plans.
“Higher sales volume of 8–10%,” is expected, notes Maybank’s Lee in a March 20 report. “Though Top Glove’s weekly sales order has more than doubled and its sales lead time has jumped to four months, versus a pre-Covid-19’s four to six weeks, sales volume growth is capped by its capacity growth of 8%,” she adds. And with strains from a shortage of workers, Lee foresees difficulties in increasing the present factory utilisation rate rising to 95%, from the present 90%.
Meanwhile, Riverstone is a favourite of CGS-CIMB analyst Ong Khang Chuen who expects a 16% increase in its production line in FY2020. He is also looking at a 20% growth sales volume with healthcare gloves accounting for 85% and the cleanroom segment making up the remaining 15%.
DBS’s analyst Ling Lee Keng agrees, adding that Riverstone’s overall gross margin is likely to be higher than the industry average of 18%. “We see value in Riverstone’s hard-to-replicate cleanroom business that sets it apart from its competitors. Glove makers are generally regarded as defensive and relatively more stable given their resilient demand,” she says.
For 4QFY2019 ended December 2019, Riverstone reported revenue of RMB257.4 million, unchanged from the year earlier. However, due to higher tax expenses from lower reinvestment allowance, earnings dropped by 2.6% y-o-y to RM32.1 million. Overall, FY2019 revenue increased by 7.4% to RM989 million. However, due to slightly smaller gross margin because of a lower average price, FY2019 earnings increased by just 0.6% y-o-y to RM130.4 million. With better demand visibility, both Ong and Ling are calling Riverstone a ‘buy’, with target prices of $1.30 and $1.34 respectively.
Still, investors need to be very mindful of volatility currently in the broader market where even quality blue chips suffer from indiscriminate selling. W Capital’s Wayne reminds investors to err on the side of caution and keep a close watch out for potentially better buying opportunities. “It may be good to hold off for a bit to get a better deal,” he says.
