The initiation coverage report on Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd at target prices of RM3.50, RM8.50 and RM3.80, respectively, was a contrast view as compared to local research houses who remain positive on the sector’s outlook. PETALING JAYA: JP Morgan is likely the first research house to issue “underweight” calls on three local glove players who have experienced a run up in share prices since May this year. The initiation coverage report on Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd at target prices of RM3.50, RM8.50 and RM3.80, respectively, was a contrast view as compared to local research houses who remain positive on the sector’s outlook. Top Glove closed 8.7% or 60 sen lower at RM6.30, while Kossan closed 12.8% or 69 sen lower at RM4.70. Hartalega, which confirmed yesterday that 35 of its employees have tested positive for Covid-19, saw its share price decline 12.83% or RM1.76 to RM11.96. According to an analyst, JP Morgan’s view on the three glove makers was more conservative than the consensus view. “Typically, the super-cycle earnings are pegged at low valuations but in JP Morgan’s case, they are pegging normal earnings at low valuations. “JP Morgan is also expecting the average selling prices (ASPs) of gloves to decline slightly faster than expected, ” the analyst said, adding that the research house’s assumptions on the glove makers could be premature. Last Friday, JP Morgan forecast glove prices to decline on a quarter-on-quarter basis from the third quarter of 2021 onwards. The research house explained that Covid-19 testing data trends of 13 out of 17 highly populated nations as of end-September have started to trend downwards from their peaks. This, in turn, serves as an early indication that glove prices might have peaked, and similarly for producers’ profits and share prices, it said. JP Morgan noted that current glove prices are US$100 per thousand pieces, which are five times higher than pre-Covid-19 levels. “Our base glove price for 2022 is about US$30. Our financial year 2022 (FY22) target price-earnings (PE) multiple on Top Glove, Hartalega and Kossan is 18 times, which implies valuation mean reversion as supernormal growth fades, ” the research house said. JP Morgan also cautioned the overcapacity risk and rising costs for the glove makers, in addition to the crowded trade of glove stocks. “Escalation in butadiene prices plus higher labour costs could structurally elevate the cost base, which could dampen post-Covid-19 profitability. Our proprietary analysis shows most funds have exposure in gloves and their cash holdings are low. “To date, local mutual funds have invested 11% of assets under management in gloves. Retail and foreign participation are at all-time highs. It is thus difficult to find incremental dollars to drive this sector higher, ” it said.
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