The rubber glove sector has continued to outperform the market – stock-price performance has risen by 32% over the past 2 weeks and outperformed the FBMKLCI by 32.5ppts. The strong performance was due to the latest guidance provided by companies indicating that there is a high likelihood that ASP could increase by 5-8%/mth starting June, which is significantly higher than the 1-3% that we had anticipated. As such, we are raising our earnings growth forecast for the sector, along with our EPS estimates and target prices for the 4 companies under coverage. We maintain our Overweight call with Top Glove and Kossan as our top BUYs for the sector and country. We also raise Harta to BUY from Hold.

Demand Continues to Remain Robust

Demand for rubber gloves has continued to surprise us on the upside, as some manufacturers have started accepting orders for delivery 1 year in advance with 20% deposits. The strong demand has also given manufacturers the flexibility to continue raising selling prices, which we are now forecasting at 5-8%/mth starting from June, higher than the 1- 2%/mth we forecasted earlier. Although selling prices will only be confirmed 1-2 months prior to delivery, buyers are still likely to take delivery or risk losing their deposits.

Record Earnings for 2020

With the current robust demand, we believe that the sector should achieve record earnings in 2020. Unless COVID-19 is no longer a threat, the robust demand for rubber gloves is likely to stay. Given that we are only expecting a 10%-12% increase in (effective) capacity in 2020, we believe that there will still be shortages of gloves in 2021, although the problem is not as severe as currently experienced. As such, we are forecasting ASP to increase by around 3-5% for the whole 2021. However, we believe that demand could ease if a vaccine for COVID-19 is available to the public.

Positive Sentiment Pushes Share Prices Higher

Although the sector PER is currently trading above +2SD of its historical average, we don’t think that valuations are overstretched yet as there could still be upside risk to the earnings forecasts given that we have assumed demand to normalize by 2H21. We are not expecting any negative surprises in the earnings of the glove companies, for at least the next few quarters, as we do not foresee any execution risk. The strong earnings growth would likely help to re-rate the sector further.

Still Not Time to Take Profit Yet

As such we are maintaining our Overweight call on the sector, as we believe that there is a high certainty on the sector earnings. Top Glove and Kossan remains our top BUY pick for the sector and country. Meanwhile, we also raise Harta from a Hold to Buy.

Source: Affin Hwang Research - 22 May 2020