• Take the kid gloves off – new leadership to reinvigorate the market. We had predicted that Malaysian stocks performance would remain constructive in 2021. So far up until April 21 some of the predictions had materialised as the economic recovery gained momentum around the globe and vaccine development saw progress. The KLCI fell in Jan and Feb as bond yield rose and only began to recover in March. Since the end March however, the market has shifted back to healthcare sector and identified this as new leadership.

• Glove stocks view reemphasised. We reiterate our view made in March 2021 calling for gloves to outperform the market. Since vaccine availability in November 2020, Malaysian glove companies have seen their share prices slumped by half on average. Despite record quarterly profits announced by Supermax (Jan 2021), Top Gloves (February 2021), Comfort (March 2021), and earnings upgrade by analysts, the market appeared perplexed on how to value glove stocks. Key risks such as vaccines and oversupply leading to lower ASP have been discussed but their negative impact on earnings beyond the supernormal profit of 2020-21 is still debatable.

• Glove sector trashing may have been behind us. We are restating our earlier view that the next leadership rein would be seen in the glove sector. Plenty of negative news has battered the sector, ranging from oversupply to falling ASP to poor ESG, as analysts and investors turned their backs on stocks that were the first to have reignited the Malaysian market ravaged by the Covid-19 pandemic in 2020. Despite the recent recovery in prices by some 10- 20%, we think glove stocks currently offer compelling value as sentiment improves amid rising Covid-19 cases worldwide.

• Value compelling, schism on ESG. The mainstream view currently is for supernormal profits to evaporate. On the contrary, although glove sector earnings are projected to decline in FY22, they remain well above pre-Covid level glove. Also, glove stocks are yielding well above their historical level, as companies begin to dish out higher dividends. Low PE, active capital management (share buybacks, high DY) will be intertwined with ESG issues which are being vigorously rectified by companies – setting the tone for investors’ returning into glove sector, in our view. OW sector and BUY Top glove, Hartalega, Supermax, Kossan.

Source: BIMB Securities Research - 26 Apr 2021