Glove average selling price is not expected ‘to fall off a cliff’

ALTHOUGH there is a trend of glove average selling price (ASP) softening in subsequent quarters as per Top Glove Corp Bhd’s latest results, the decline will likely occur at a slow pace on the back of still robust demand.

Kenanga Research does not expect the ASP to fall off a cliff despite average lead time being reduced from 300 days in early January 2021 to 200 days currently.

“(This is) compared to 20-30 days pre-COVID-19 supported by post-pandemic demand growth averaging 15%-20% per annum,” projected analyst Raymond Choo Ping Khoon in a glove sector update.

“Furthermore, we believe share price retracements of 50-60% over the past few months have priced-in weakness in ASP trend will be moving into 2H 2021.”

Top Glove, which is the world’s largest glove maker, has highlighted that its nitrile gloves’ ASP would be lower in the coming months by 3-5% month-on-month (mom) but cushioned by a similar increase in latex gloves.

Although sentiment on the sector is diminishing, lead times suggest that CY2022 demand will remain strong from increased demand brought by heightened hygiene awareness extending beyond the healthcare sector, according to Choo.

“Incremental volume growth is expected from new users of examination rubber gloves including nitrile and latex-based ones,” he justified.

“Latest news reports that the resurgence of COVID-19 cases have led to lockdowns in Europe as the third wave of the pandemic has swept across Europe.”

This has led to several European countries extending or re-introducing lockdown measures, including Spain, Germany, France and Italy.

Moving forward, Kenanga Research which maintained its “overweight” outlook on the rubber glove sector has conservatively assumed ASP of US$40-US$46/1,000 pieces for CY2022.

From the perspective of a long-term investor, it opined that there is still significant value to be derived from Malaysian glove players which command 65-68% of global market share besides having consistently evolve and innovate in terms of products offerings, capacity expansion and plant modernisation via automation.

The research house’s top pick is Hartalega Holdings Bhd (“outperform”; target price: RM17).

“We like Hartalega for (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) trading at nine times CY2022E earnings per share (EPS) based on ASP assumption averaging US$46/1,000 pieces,” suggested Kenanga Research.

“At current price, the stock offers 9% dividend yield based on our FY2022E forecast.” – April 2, 2021

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