AS some retail investors were rejoicing over the prospect of Melaka and eventually the Sarawak state elections contributing to a spike in COVID-19 cases – which should have positive correlation on the share price of glove counters – little did they realise that JP Morgan has a trick up its sleeve.
In fact, this so-called ‘trick’ has culminated in a bombshell with the research house once again slashing its target price of three prominent Malaysian glove makers under its radar. The timing of the exercise came at a time when Malaysian listed glove makers are being traded near their 52-week lows.
Top Glove Corp Bhd, the world’s largest glove producer, incurred a RM2 deficit with its new target price of RM1.50 (from RM3.50 previously) while its rating was maintained as “underweight”.
For Hartalega Holdings Bhd, JP Morgan ascribed an “underweight” rating with a fair value of RM4 (previously RM8.50) while Kossan Rubber Industries Bhd was rated “neutral” with a fair value of RM2 (previously RM3.80).
At today’s mid-day trading, Top Glove shed 13 sen or 5.18% to RM2.38 with 13.4 million shares traded (market cap: RM19.53 bil); Hartalega retreated 12 sen or 2.2% to RM5.33 with 2.3 million shares traded (market cap: RM18.27 bil); while Kossan declined 4 sen or 1.93% to RM2.03 with 4.53 million shares traded (market cap: RM5.19 bil).
Even Supermax Corp Bhd which makes up Malaysia’s Big Four glove maker – but not in JP Morgan’s list – has to bear the brunt of the JP Morgan’s downgrading after its share price slid 4 sen or 2.2% to RM1.78 with 9.85 million shares traded (market cap: RM4.84 bil).
In their research note, JP Morgan analysts Jeffrey Ng and Sean Teo justified that the operating margin per unit (OPM) from the latest results briefings of the Malaysian glove makers might fall below pre COVID-19 levels despite earlier estimates forecasting a better-than-pre-COVID-19 OPM.
“The industry is still finding [its] bottom. Note that glove ASP has dropped from US$115 in February to today’s US$28-US$30,” the duo pointed out.
“It is now clear that glove ASP has reverted to a cost-plus basis. Channel checks indicate that current OPM is already nearing pre COVID-19 margins. But the main question is will margins compress below pre COVID-19 levels due to intensified competition from China?”
The analysts added the risks are tilted toward the downside although the market has not fully discounted such risk.
JP Morgan also outlined risks to its bearish sector call which includes a sharp cut in planned capacity expansion which reduces price competition risk, and unexpected changes in nitrile and natural rubber prices which could uplift glove prices from their current lows.
Further challenges to its sector call would be a consistent step-up in dividend pay-out and balance sheet management, a substantial depreciation of the ringgit that would improve profits as gloves are sold in US dollar terms. – Nov 18, 2021
