Going into 2H21, we expect nitrile glove ASPs to average at USD65-75 per thousand pieces. With vaccines appearing less effective against certain new variants and winter towards year end, we do not rule out the possibility of Covid-19 cases rising again, despite vaccination efforts in key markets. We lower Top Glove’s FY21/22 net profit forecasts by -3.3%/-2.6% and Kossan’s FY21 net profit forecasts -7.9% to account for lower sales volumes from smaller workforce capacity during FMCO. Maintain OVERWEIGHT. Top Pick: Top Glove (BUY, TP: RM6.72).

Decline in ASPs begin, but supply shortage remains. While Top Glove’s ASPs have already peaked, we expect Kossan and Hartalega’s ASPs to decline in 3QCY21. Note that Top Glove’s ASPs had peaked earlier than its peers as it had reached heights unmatched by competitors. Going into 2H21, we expect nitrile glove ASPs to average at USD65-75 per thousand pieces. Despite the decline in ASPs, we note that supply shortage for disposable gloves still remains, with the crunch expected to last until 2023 before supply catches up with glove demand (Figure #1).

New variants and winter months a potential wildcard. While vaccination rates in key markets are progressing well (and resulting in lower daily Covid-19 cases) (Figure #2-3), we note that US and UK have begun relaxing lockdown rules, allowing large scale gatherings (sporting events, etc.). Despite this, there is growing evidence that vaccines may be less effective against new variants, particularly the delta variant (source). Note that while Covid-19 daily cases have declined in the US, the delta variant has roughly doubled every two weeks in the US (source). Coupled with the finding that Covid-19 (like seasonal flu) is more active during winter months (note that Covid-19 cases in US and UK peaked during winter), we reckon it is too early to rule out the possibility of Covid-19 cases rising in key markets again in the coming months, which would inevitably increase the demand for disposable gloves.

MCO3.0 impact on volumes. The recently imposed FMCO mandates that glove manufacturers operate at 60% workforce capacity from start-June for the duration of the ‘total lockdown’. Furthermore, in the government’s National Recovery Plan, Phase 2 & 3 (July-October 2021) continues to mandate that manufacturers operate at below full capacity (80% workforce). As such, we expect sales volumes in 2H21 to remain sluggish.

Dividend yield. At these price levels, we expect the healthy dividend yields of glove players to support share prices. At current prices, glove players have FY21/22 dividend yields of 6.9%-19.2% (Figure #4).

Forecasts. We lower Top Glove’s FY21/22 net profit forecasts by -3.3%/-2.6% and Kossan’s FY21 net profit forecasts -7.9% to account for lower sales volumes from FMCO impact on operations mentioned above. We keep Hartalega’s forecasts unchanged as we had already factored in impact from FMCO.

Maintain OVERWEIGHT. After adjustments to our forecasts, our TP for Top Glove (RM6.76 to RM6.72) and Kossan’s (RM5.60 to RM5.54) are adjusted downwards slightly. We value the glove companies using with their pre-pandemic 5-year average PE multiple of (CY15-19) based on sustainable earnings in a post-super normal earnings environment summed with free cash flows (both discounted back to PV) generated during the boom period. This encompasses earnings in a post-pandemic era as well as high profits generated during the pandemic (Figure #6-8). Our top pick remains Top Glove (BUY, TP: RM6.72).

Source: Hong Leong Investment Bank Research - 2 Jul 2021