SENTIMENT towards the glove sector has doubtlessly changed – as evident on the stock price regression of the Big Four glove counters – given the rapid development on the COVID-19 vaccine scene.
Some investors have increasingly shifted their focus to recovery beneficiaries which has led share price correction of glove stocks across the board on Bursa Malaysia.
On the other hand, most glove companies expect 2021 to be a stronger year for them due to higher volume as a result of their production expansion coupled with higher average selling prices (ASPs) compared to 2020.
Some players expect sequential quarter ASP growth to continue into 3Q CY2020. While this is possible, MIDF Research opined that the rise will be at a smaller quantum due to the high-base effect.
“ASPs have more than doubled in 2020 compared to 2019,” the research house pointed out in a thematic report that focuses on the glove sector.
“We do not discount the possibility of softening blended ASPs in the second half when urgent sales start to soften.”
This is more likely to impact the spot price segment which is usually quoted at a higher selling price compared with contract orders. That said, the research house does not expect ASPs to decline sharply because demand may continue to exceed supply.
“With industry players projecting shortage in nitrile gloves that could possibly last until 2023 due to the shortage in raw material supply, ASPs for rubber gloves are expected to remain robust in the next 18 to 24 months,” projected MIDF Research.
“We view that high raw material prices will lend support to ASP of nitrile gloves.”
While industry players are expanding at a faster pace to keep up with demand, the research house reckoned that this is not done without challenges.
Other than the shortage in nitrile rubber, the industry is also facing labour shortage due to the closure of international borders.
The established glove players expect to further automate their processes in order to reduce number of workers per million pieces.
“The four companies under our coverage expanded by an estimated 21% in CY2020 compared to the preceding year when demand growth was estimated at 25%,” observed MIDF Research.
“Production challenges are among the main reasons why industry players foresee that demand will exceed supply in the near future.”
Going forward, the research house acknowledged that companies under its coverage are looking to further improve their products and manufacturing processes through research & development (R&D) as well as sharpening their business strategies.
All-in-all, MIDF Research maintained its positive view on the sector as it believes that demand growth will continue after the COVID-19 pandemic.
“Malaysia supplies about 65% of the world’s total rubber gloves which means collectively, Malaysian glove companies have market leader advantages,” justified the research house.
“The mature ecosystem in the country which has been built over a period of more than three decades, is expected to allow the established players to continue to remain efficient and competitive in the long term.”
On this note, MIDF Research maintained its “buy” recommendations on all the Big Four glove makers – Hartalega Holdings Bhd (target price: RM18.25), Top Glove Corp Bhd (TP: RM8.29), Kossan Rubber Industries Bhd (TP: RM7.33) and Supermax Corp Bhd (TP: RM13.83). – Feb 19, 2021
