AmResearch: Very little upside left for glove stocks

IN one of the rarer glove sector review, AmResearch has maintained its “neutral” view on the sector given valuations for glove companies under its radar are already fully reflected in their earnings outlook.

The three glove counters under the research house’s coverage are Top Glove Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd.

“We reckon the average selling prices (ASP) will begin to ease after the first half of the year (1H 2021) following the strong increase over the past nine months, and are already priced in,” projected analyst Thong Pak Leng in a glove sector update.

“Moreover, we are cutting our target price-to-earnings ratio (PER) by 10% across the board to take into account the risk of a down cycle in the sector as a result of successful roll-outs of COVID-19 vaccines.”

While it believes that glove makers’ fundamentals remain steady for the next few years, AmResearch noted they offer limited upside at their current share prices. “Hence we advise investors to accumulate at lower levels,” suggested the research house.

Moreover, Thong pointed to the rising raw material cost, notably rubber prices which have been increasing over the past 12 months as protective glove demand surges due to COVID-19.

“At the same time, the price of butadiene which is the key ingredient to produce nitrile has also been on the rising trend over the past six months,” revealed the analyst.

“Nonetheless, we believe glove makers will be able to pass on the price increase to buyers, thus keeping their margins safe.”

Below are AmResearch’s assessment of three of the Big Four glove stocks:

  • Maintain “hold” call on Top Glove with a fair value (FV) of RM6.50/share with net profit forecast at RM2.9 bil, RM2.7 bil and RM1.5 bil for FY2021-2023F respectively (ASP assumptions for FY2021-2023 are US$82/1,000 pieces, US$30/1,000 pieces and US$25/1,000 pieces respectively).
  • Maintain “hold” call on Hartalega with a FV of RM12.25/share with net earnings forecast of RM2.1 bil, RM1.3 bil and RM1.1 bil for FY2021-FY2023 respectively (ASP assumptions for FY2021-FY2023 are US$40/1,000 pieces, US$33/1,000 pieces and US$32/1,000 pieces).
  • Maintain “hold” call on Kossan with a FV of RM4.80/share with net earnings forecast of RM903.8 mil, RM1.4 bil and RM511.3 mil for FY2020–FY2022 respectively (based on ASP assumptions of US$31/1,000 pieces, US$40/1,000 pieces and US$29/1,000 pieces). – Jan 13, 2021
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