Areca Capital CEO Danny Wong (pic) says glove stocks will continue to see price volatility in the coming months, depending on newsflow. THE first week of March saw a slide in glovemakers’ stock prices, before some uptick on Wednesday and Friday which was attributed to bargain-hunting. Areca Capital CEO Danny Wong (pic) says glove stocks will continue to see price volatility in the coming months, depending on newsflow. “The billion ringgit question – will glove demand continue to remain high, relative to increasing production and supply? No one can answer this.” Wong opines that there are two extreme views among glove investors. “One view is that with the Covid-19 vaccines, the pandemic will be over, and demand for gloves will fall. In this scenario, if glovemakers’ earnings go back to pre-pandemic levels, then the current stock prices look very expensive. “The other view is of long-term investors who say glove demand will continue to be high, with more awareness about hygiene and health. The pandemic will not be completely gone, ” he says. Wong says investors are buying in anticipation of strong results by Top Glove Corp Bhd, which will release its financial results on March 9. Meanwhile, Rakuten Trade head of equity sales Vincent Lau (pic below) points out that there is unlikely to be any positive surprises from glovemakers, going forward. “The market has already factored in that glovemakers’ earnings in 2021 will be very strong. However, there are worries about overcapacity, and glove average selling prices (ASPs) – how fast and when they will fall with increasing Covid-19 vaccinations, ” says Lau. Despite diminishing sentiment on the sector, the share price re-tracements in glove stocks present a buying opportunity, according to a recent Kenanga Research report. “Based on our earnings forecast where we conservatively factored in normalised ASPs assumption in our estimated financial year 2022 (FY22) earnings, glove stocks under our coverage are currently trading at six to nine times FY22 price-earnings ratio (PER), compared with normalised mean PER of 15 to 28 times, and offering dividend yields of 7%-10%, ” says the Kenanga Research report. MIDF Research analyst Ng Bei Shan (pic below) says among the main reasons for the softening in glove stock prices, is the shift in investor sentiment to recovery-themed stocks due to the Covid-19 vaccination newsflow. Ng says although glove ASPs are likely to remain high this year, they may possibly soften in the second half. “However, the ASP correction is expected to be gradual as the vaccination programmes will take some time, ” she told StarBiz. Meanwhile, another bank-backed research analyst says although glove stocks’ valuations are deemed very attractive now, investors are looking ahead to potential earnings post-pandemic. “At this juncture, we can’t be sure what kind of level ASPs will be at in 2022 or 2023, ” he said. The research analyst surmised that some of the recovery in glove stock prices, might be due to their cheap valuations. “Perhaps, investors are also anticipating another solid quarter from Top Glove, ” he says. Glovemakers expect 2021 to be a stronger year due to higher volume as a result of their production expansion, coupled with higher ASPs compared with 2020. Ng does not expect the new glovemakers to contribute to a surge in supply, as they are most likely to start from a smaller scale. “Glove supply is capped by the raw material limitation as well as the availability of foreign labour due to the closure of international borders, ” she points out. A recent MIDF Research report notes that glovemakers are projecting a shortage in nitrile gloves that may last till 2023 due to the shortage in raw material supply. The report says gloves’ consumption are expected to remain high in 2021, as mass and random testing will continue until a wide population is vaccinated. “For example, in the United States, US$50bil is allocated to expand testing to buy rapid tests, increase laboratory capacity to support regular testing in schools so that they can reopen. “Industry players also expect high demand for rubber gloves from the massive rollouts of vaccines. Buyers may need a few more month to rebuild their inventory level, ” says the report. According to the Malaysian Rubber Glove Manufacturers Association, glove demand is expected to grow by 15% to 20% per annum going forward. Prior to the pandemic, demand for gloves was growing by 8% to 12% per annum. MIDF Research also notes that as of Feb 16, only 94.6 million people or 1.2% of the world’s population have received the Covid-19 vaccine. In a recent statement, the Malaysian Rubber Council (MRC) is anticipating the demand for medical gloves to eventually normalise as Covid-19 vaccines are expected to be made widely-available by the second half of 2021. MRC CEO Brandon Chan (pic below) anticipates that on-going expansion plans by existing and new local glovemakers will support industry growth. In 2020, export revenue from the rubber gloves industry jumped 103% year-on-year to hit RM35.3bil, according to MRC. To put that into context, this translated into 86.2% of the total export revenue of RM40.96bil of the Malaysian rubber products sector in 2020, which had jumped 75.6% year-on-year to exceed RM40bil for the first time. According to MRC, the overall rubber products industry contributed almost 5% to national exports in 2020. The MIDF Research report says Malaysia supplies about 65% of the world’s rubber gloves, which means collectively, Malaysian glove companies have market leader advantages. The United States was the biggest recipient of Malaysia’s rubber gloves, with one third (33.9%) of exports in 2020. Other key markets were Germany (6.3%), Japan (5.8%), the UK (5.5%) and China (4.7%).
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