UOB Kay Hian downgrades rubber glove sector by a rung to neutral

THE high-flying glove sector may have met its match after all judging from UOB Kay Hian Research latest assessment of the sector which led the research house to downgrade the sector’s outlook to “market weight” (from “overweight” previously).

Although the industry’s prospects remain intact against a backdrop of undemanding valuations, the research house contended that (i) unparalleled share price surge, (ii) normalising valuations after peak quarterly earnings, and (iii) negative sentiment permeating through the sector may be too steep a challenge to overcome.

“We downgrade sector to “market weight” as the sector approaches peak quarterly earnings,” justified Philip Wong in a sector update. “We (therefore) normalise our target prices based on 2023 valuations and dividend-related windfall earnings.”

Elaborating further, Wong observed that glove valuations have moderated over the past six months, almost three to four quarters ahead of anticipated peak quarterly earnings in 2Q-3Q 2021.

“This is in contrast to previous glove cycles which suggest that valuations moderate in tandem with peak quarterly earnings,” he opined. “Therefore, it implies both limited upside and downside.”

According to UOB Kay Hian Research, this is amid a backdrop of earnings that are gradually normalising alongside average selling prices (ASPs).

“Furthermore, our revised valuation methodology on glove companies that factors in the present value of dividends and mean PE valuations on normalised 2023 earnings suggests decent upside to existing valuations,” observed the research house.

UOB Kay Hian’s top sector pick is Top Glove Corp Bhd for its attractive valuations given the potential lifting of its sale ban by the US authorities is bound to have catalytic effect on its valuation.

“We also like Supermax Corp Bhd for its ambitious expansion plans coupled with a re-rating laggard to its peers,” noted the research house. – March 17, 2021

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