ALL Big Four glove makers succumbed to bouts of profit taking on the first two hours of trading on Bursa Malaysia today, no thanks to the latest grim outlook on the glove sector by JP Morgan last Friday.
The US investment bank has reinstated coverage of Top Glove Corp but with an “underweight” recommendation and a fair value of RM3.50 which is about half the latter’s market price of RM6.90 on Friday.
In short, JP Morgan sees the passing of a supernormal growth cycle for Malaysian glove makers in anticipation of a huge oversupply in the market as glove demand decelerates in tandem with the pace of testing for COVID-19.
Besides the world’s largest rubber glove maker, coverage was also initiated on rivals Hartalega Holdings Bhd and Kossan Rubber Industries Bhd, ironically with also “underweight” ratings.
The fair value JP Morgan accorded to Hartalega was RM8.50 which is a 38% discount from its Friday’s closing price of RM13.72 while that for Kossan is RM3.80 which is 30% lower than its last traded price of RM5.39.
This somehow went against the tide as most if not all local research houses have somehow maintained their “buy” rating on the Big Four glove producers on the back of bullish demand and anticipated hike in their average selling prices (ASP).
Whether JP Morgan’s assessment is justified or otherwise, one thing for sure is that its bleak outlook is bound to have ‘biblical’ impact on investment decisions by foreign funds, many of which adhere to stringent environment, social and governance (ESG) standards.
This very one fact surely does not augur well with the industry, especially in the case of Top Glove which is under the spot light for major breaches of various “social” criterions of responsible investing. The latest unpleasant revelation is obviously the death of a Nepalese security guard who died on Dec 12 – believed to be linked to COVID-19.
The news of Yam Narayan Chaudhary’s death comes hours after news reports of Top Glove allegedly dismissed one of its foreign workers who is said to have exposed the workers’ crowded working conditions.
Reuters reported that Yubaraj Khadka had taken photos in May of workers failing to maintain the recommended one-metre physical distance as they queued up to get their temperatures checked before starting the night shift.
Attempts by FocusM to get reaction from heads of research was not successful as it is the policy of research houses not to comment on other houses’ valuations.
However, one research head who spoke to FocusM on condition of anonymity noted the following:
“Don’t think it’s a fair reflection. At current share price, Top Glove is trading at a price-to-earnings ratio (PE) of 13 times for FY2024F using a normalised ASP of US$30/1,000 pieces and targeted expansion plans.
“Note that pre-COVID-19, Top Glove traded at around 25 times levels. Using the same multiples will derive at a target price of RM11.82/share. Therefore, a RM3.50 target price is an overkill.”
At 11.20am, the Big Four glove makers emerged the biggest losers in the local bourse (the FBM KLCI was up 6.3 points at 1,690.88).
Hartalega fell the most, declining RM1.30 or 9.48% to RM12.42 with 4.9 million shares traded; followed by Supermax Corp Bhd which dipped 65 sen or 8.6% to RM6.91 with 25.32 million shares transacted; Top Gove shed 43 sen or 6.23% to RM6.47 with 43.61 million shares traded while Kossan dipped 45 sen or 8.35% at RM4.94 with 6.78 million shares transacted. – Dec 14, 2020
