Supernormal profit not for long, stock rally priced in

NST Business

KUALA LUMPUR: Public Investment Bank Bhd has cut its rating on the rubber glove sector to "neutral" from "overweight"as it believes the supernormal profit is not sustainable in the long run.

Furthermore, PublicInvest said the glove stocks' current valuation had ran ahead of their fundamentals.

The firm said the Covid-19 pandemic outbreak had led to sharp spike in rubber gloves demand in recent months, as distributors and government agencies scramble to buy more medical gloves, in fear of a dire shortage of protective gears.

"The desperation for gloves has driven ASP (average selling price) higher and we expect the price uptrend to continue as demand for gloves remains strong," it said in a report today.

"However, we caution that such strong profits are unsustainable in the long-run and we expect earnings to peak in calendar year 2021, therefore we reckon it is not justifiable to continue valuing the glove players at +2SD (standard deviation) of its respective five-year historical mean,"it added.

PublicInvest revised Hartalega Holdings Bhd and Kossan Rubber Industries Bhd's earnings forecast for financial years 2020-2022 by 11-124 per cent to account for the higher ASP assumption and operational efficiency.

The firm kept its "neutral" call on Kossan and Hartalega, but upgraded Top Glove Corp Bhd to "trading buy" as its target price implied an upside of 25 per cent following a retracement in its share price since its recent downgrade.

"We reduce our price earnings multiple for both Hartalega and Kossan to 38x and 26x respectively, which is at +1SD of its five-year historical mean," PublicInvest said.