Supernormal rubber glove demand over next two years

KUALA LUMPUR: Acute supply and supernormal demand of rubber gloves could persist over the next two years, Kenanga Research said.

Its analyst Raymond Choo Ping Khoon said glove makers had received orders for new users including airlines, restaurants, retail apparel chains and hotel operators.

"If we look at the capacity expansion numbers in isolation, it looks overwhelming. Juxtaposed against the annual demand growth and new pandemic-led demand, the additional capacity is not a concern," Choo said in a report today.

He said the estimated new yearly capacity may not actually start as scheduled and hence the supply shortage will continue to be acute in 2021.

Choo said on average, two to three plants were required annually for glove makers to meet the supernormal demand, which take between 12 and 24 months to complete.

"We conclude that the average selling price (ASP) tightness will continue going into 2021. We highlight that rumours of a player in China ramping up capacity by 30 billion pieces over two to three years appears absurd which typically takes eight to 10 years to build," he said.

Choo noted that Top Glove Corp Bhd stock had veen down 15 per cent in the past few days.

This was due to the alleged ill treatment towards foreign workers, fears of oversupply and rumours of windfall tax, which Kenanga Research believes, had been largely overplayed.

"The stock is currently trading at undemanding price-earnings-ration valuation of slightly above mean at 21 times compared to earnings growth averaging 130 per cent for the financial year 2020 (FY20) and 2021 (FY21)."

Kenanga Research maintained Top Glove target price of RM25 per share and reiterated an "outperform" call on the stock.

The firm said strong management, booming gloves market due to the pandemic and solid earnings growth averaging 130 per per annum for FY20 and FY21 would support the call for Top Glove.

However, a key risk to its call include lower-than-expected volume sales and ASP.

"We highlight that Top Glove's ASP for months of June to August is higher by 15 per cent month-on-month, indicating supply tightness.

"With a diverse customer base, we expect Top Glove to have better pricing power and hence potentially higher-than-expected industry average prices," he added.

Top Glove recently highlighted that 20 per cent of its new capacity would be allocated to spot price, between US$80 and US$100 for 1,000 pieces.