Can GLOVES maintain their performance?

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Publish date: Sat, 05 Dec 2020, 09:02 AM

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https://www.thestar.com.my/business/business-news/2020/12/05/can-glove-makers-maintain-their-performance

Can glove makers maintain their performance?

By INTAN FARHANA ZAINUL

Corporate News
Saturday, 05 Dec 2020

THE rubber glove sector has been one of the biggest winners during the outbreak of the coronavirus (Covid-19) pandemic.

Players have enjoyed supernormal profits, given the surge in both demand and the average selling prices of gloves.

As a result, listed local glove producers have experienced a meteoric rally in their share prices, with Supermax Corp Bhd and Top Glove Corp Bhd jumping by as much as 1,100% for and 330% respectively this year.

The historical leap has led these companies to be included in the FBM KLCI 30 companies index.

But with vaccine news making more headlines, is the party for the glove industry over?

This week the UK has emerged as the first country in the developed world to authorise a Covid-19 vaccine, which gives a glimpse of hope of a revival in economic growth in 2021.

Many investors have shifted their focus from “pandemic plays” into “recovery plays” since several pharmaceutical giants announced the effectiveness of their Covid-19 vaccine last month.

For example US pharmaceutical giant Pfizer and its German partner BioNTech said a final analysis of the phase three trial of the vaccine shows it was 95% effective in preventing infections.

In an interview with CNN, BioNTech CEO Ugur Sahin said: “We believe it is really the start of the end of the pandemic.”

Pfizer is hoping to ship out up to 50 million doses this year for 25 million people, and produce 1.3 billion doses in 2021.

Locally, the Employees Provident Fund (EPF), which bought Top Glove Corp Bhd stocks in early October raising its stake from to above 6.6% in mid-November, is now paring down its position in the counter.

As at Dec 3, EPF reduced its stake to 5.8% in Top Glove.

This could also be due to Covid-19 infections at the world’s largest glove producer’s facilities, which in turn led to a slowdown in its operations.

In October, the EPF also increased its position in Kossan Rubber Industries Bhd from 1% to 8.9%. EPF emerged as a substantial shareholder in two Singapore-listed Malaysian rubber glove companies, namely UG Healthcare Corp Ltd and Riverstone Holdings Ltd.

UG Healthcare has two manufacturing plants in Seremban while Riverstone, which is headquartered in Selangor, has manufacturing plants in Taiping, Thailand and China.

More players

Some analysts reckon that the demand for gloves would remain strong in 2021 and that glove makers have more room to run due to spiking numbers of infections worldwide and longer vaccination periods.

However, considering the lofty valuations of glove counters coupled with the fact that more players are jumping into glove manufacturing, has the sector hit a plateau?

“Hospitals and health services would continue to stock up on gloves but the sustainability of the high average selling prices (ASPs) in the next two to three years will be a challenge. Then there is an issue of raw material supplies that could raise production cost. There are also labour shortages, ” opines an analyst.

In particular, the analyst raised concerns about the prospects of the new players in the glove manufacturing industry.

He questioned whether they will be able to enjoy handsome profit margins next year due to constraints of raw material prices and the potential oversupply of gloves.

Among companies which have announced forays into glove manufacturing are Mah Sing Group Bhd, Vizione Holdings Bhd, INIX Technologies Holdings Bhd, AT Systematization Bhd and Hong Seng Consolidated Bhd.

“The raw materials to make nitrile gloves would be the main challenge for the new players as they have to compete with the big boys, ” a market observer says.

In fact, vaccine-related news has resulted in local glove stocks retracing from their peaks. Kossan for example, did not make into Bursa Malaysia’s FBM KLCI 30 companies this week.

Nonetheless, Supermax made into the index this week, joining the likes of Top Glove and Hartalega Holding Bhd.

Supermax replaced KLCCP Stapled Group following the review of the FTSE Bursa Malaysia Index Series.

Price and demand

Many analysts though remain bullish on the sector as they expect demand to remain strong.

MIDF Research expects that in 2021, the demand for gloves will continue to be supported by mass testing and the administration of Covid-19 vaccines.

“We opine that ASPs may peak in 2021 but we do not expect a big decline in prices after a safe and effective vaccine is widely available, ” it said in a recent report.

However, the research house reckoned that glove spot prices may soften in the second half of 2021, once urgent orders are reduced on the back of vaccine development.

During the Covid-19 pandemic, MIDF had said that the demand for gloves jumped by 25% to 30% on top of the annual requirements for rubber gloves.

Post pandemic, the demand for gloves is projected at a growth rate of 12% to 15% compared to the 8% to10% organic growth prior to the pandemic, it added.

“We are still positive on the sector as we think that demand and ASP trends may likely rebalance into end of 2021 or beginning of 2022. Even without the pandemic, the annual demand growth is expected to come in higher in the teens compared to 10% or below previously, ” MIDF said.

Recovery play

Nonetheless, AmInvestment Research reckons that there could be further weakness in glove stocks as investors continue to lighten their positions in “pandemic plays” and switch to “recovery plays”.

Among the sectors that will be in the investors radar include banking, power, oil and gas, consumer and transport sectors.

“The share price direction of the two FBM KLCI weighted glove stocks, namely Top Glove and Hartalega, still has significant bearing on the FBM KLCI with a combined weighting of 10.2% at present.

“It peaked at 14.6% in October 2020, almost tripling from 4.9% in May 2020 prior to the massive rally driven by the surge in glove selling prices, ” it said.

It’s worth noting that the glove sector is a cyclical sector and it could be affected if the world exits the pandemic.

However, while vaccine news could impact the sentiment of the glove sector, many glove players are expecting demand could remain elevated even post pandemic as the consumption trend of gloves has changed quite dramatically due to the pandemic.