HLIB Research: It’s not game over for glove sector: vaccination isn’t a threat

ALTHOUGH the tide may seem to have turned against glove counters in recent times with the advent of vaccination, there is still much exuberance left in the sector, according to Hong Leong Investment Bank (HLIB) Research.

For the foreseeable future, the research house opined that glove demand and their average selling prices (ASPs) will be driven by testing frequency and vaccine roll-out using gloves.

“For the remainder of CY2021, we expect the vaccination demand for gloves to more than offset the decline from testing demand,” justified analyst Gan Huan Wen in a rubber glove sector update.

“Even with global supply expected to rise by circa 20%, we expect a supply shortage of circa 12.4 billion pieces in CY2021.”

HLIB Research observed that gloves are currently being used by most countries when administrating vaccines, notably those with high population as well as among first world nations.

With global vaccine roll-out only beginning to take shape, the research house expects glove ASPs to remain elevated (at around US$115-140 per thousand pieces) for the time being with a possible decline in 4Q CY2021 at the earliest.

Even as the US expects to reach herd immunity by 4Q CY2021 with full vaccination by 1Q CY2022, current estimates indicate global herd immunity could take as long as five years to materialise.

“This would provide support for glove demand in the medium-term,” projected Gan.

Moreover, HLIB Research raised concerns over the efficacy level of existing batches of vaccine against newer strain variants as well as the anti-vax movement whereby 31% of US citizens were reported to be not keen of getting vaccinated.

In fact, the latest developments prompted the research house to switch its valuation methodology from straight price-to-earnings (PE) multiple to a modified discounted cash flow (DCF) valuation.

“We value the glove companies using with their pre-pandemic five-year average PE multiple of (CY2015-2019) based on sustainable earnings in a post-super normal earnings environment summed with free cash flows (both discounted back to present value) generated during the boom period,” explained HLIB Research.

“This encompasses earnings in a post-pandemic era as well as high profits generated during the pandemic.”

All-in, HLIB Research maintained its “overweight” rating on the rubber glove sector.

“Despite share prices (of glove stocks) correcting downwards, we do not expect vaccine roll-out to be as straight forward as the market suggests as logistical, procurement, anti-vax movement and second strain issues could derail efforts and thus provide support for glove demand,” justified the research house.

Based on our its new valuation methodology, HLIB Research said Top Glove Corp Bhd remains its top pick although it has lowered the company’s target price to RM8.06 (by retaining a “buy” rating) from RM10.54 previously. – Feb 16, 2021