Highlights

After two decades, West Africa is experiencing its first Ebola (see Figure #1) outbreak. This is the deadliest one since the first recorded outbreak in 1976 (see Figure #2), with 1,323 cases and 729 deaths reported so far.

Transmission occurs through close contact with blood, secretions or other bodily fluids. Thus far, there is no specific treatment or vaccine available.

This current epidemic is caused by Zaire strain, the Ebola species with highest fatality rate (see Figure #3).

Although no case has been reported outside Africa, European and Asian countries went on alert last Wednesday amid growing fears of a loss of control.

In the Malaysian context, Ministry of Health is on high alert and enhances surveillance system at international gateways.

Comments

We believe that this outbreak was the main reason behind the share rally of rubber gloves counters last week. However, we maintain neutral stance on the sector.

Despite being deadly, the number of cases or death and countries hit have yet to reach the level of H1N1 (see Figure #4) and become a catalyst of the sector for rerating.

Having said that, we will continue to monitor its development and observe whether it will be escalated to pandemic level.

WHO stated that during an Ebola outbreak, healthcare workers stand a higher risk of infection and are advised to wear face protection, long-sleeved gown and gloves. We believe this may have triggered positive market sentiment towards the glove sector.

Nonetheless, Ebola has spread beyond Africa for only once in the past in spite of being the world’s most virulent diseases, labelled by WHO.

It is mostly contained in Africa, where latex gloves are preferred over nitrile gloves.

Among the players under coverage, we believe this news is slightly more advantageous towards Top Glove as it is the top exporter of latex gloves and it has greater exposure in Africa.

Catalysts

Surge in demand in the event of a disease outbreak; more stringent requirements and increased spending in the healthcare sector; appreciation of USD against MYR; and lower rubber prices to boost profitability.

Risks

Mismatch between demand and supply in rubber gloves; potential increase in natural and/or synthetic latex prices; further depreciation of USD against MYR.

Forecasts

Unchanged except for Hartalega, as we tweaked their cost model. As a result, FY16 EPS was raised by 7.5%.

Rating

NEUTRAL

Positives – Softening of natural and/or synthetic latex prices, continuous improvement in cost efficiency.

Negatives – Weakening of USD against MYR.

Valuation

Maintain NEUTRAL stance on the sector, until we see further deterioration, with the following stock ratings:

• Hartalega (HOLD, TP: RM6.12 based on 16.2x CY15 EPS).
• Top Glove (HOLD, TP: RM4.56 based on 13.5x CY15 EPS).
• Kossan (HOLD, TP: RM3.91 based on 12.8x CY15 EPS).

Source: Hong Leong Investment Bank Research - 4 Aug 2014