Maintain OVERWEIGHT in 1QCY21. We believe the share price retracement in glove stocks in 4Q 2020 presents a buying opportunity. Gloves stocks under our coverage are currently trading at 4x-9x FY21 PER offering dividend yield of 7%-10%. Amplifying the earnings growth in the 1Q2021 and with lead times of >365 days indicating that demand will stay resilient and supply potentially exacerbated by temporary production disruption suffered by a few glove players due to COVID positive testing. We understand that thus far, ASP in 1QCY21 is expected to be higher QoQ. To reduce the spread of COVID19 infection, vaccine coverage has to reach 60-70% in order to achieve some herd immunity which could potentially take years. Based on our sensitivity analysis, assuming ASP normalizes to UD35/1,000 pieces and PER valuation tracks back to 5-year historical forward mean, there is upside to gloves stock prices over current levels. Although there is limited visibility on ASP in CY22, order-books and lead times suggest that CY22 demand will remain strong, benefitting rubber glove makers from increased volumes. Top Pick for the sector is HARTA, on ASP catch-up play and trading at 7x FY22 EPS offering 9% dividend yield.

Lead times of >365 days indicating demand is resilient with ASP expected to be higher in 1QCY21. Amplifying the earnings growth in the 1Q2021 and with lead times of >365 days indicating that demand will stay resilient given that buyers are unlikely to put down deposits if they expect demand to ease soon. and supply potentially exacerbated by temporary production disruption suffered by a few glove players due to COVID positive testing. TOPGLOV has indicated that ASP in its 2QFY21 (Dec to Feb) will be raised by 30% QoQ. We understand that thus far, ASP in its 1QCY21 is expected to be higher QoQ averaging between 30%-50%. The current nitrile butadiene (NBR) shortage should result in nitrile glove ASPs staying elevated in 2021. This could also translate to higher latex glove ASPs, due to the substitution effect. We expect hike in raw material prices due to supply constraints keeping ASPs elevated while maintaining players’ margins.

Gloves demand to remain robust, new strain of virus is a cause for concern. Latest news reports that the highly contagious, new mutation of Covid-19 found in the United Kingdom “is already in the U.S.” as more than 40 countries ban travel to and from the U.K. for 48 hours or more likely to cause more hospitalisations. To reduce the spread of COVID-19 infection, vaccine coverage has to reach 60-70% to achieve some degree of herd immunity. Typically, herd immunity occurs when enough people in a population develop protection against a disease so that it can no longer spread easily among them. The UK has become the first country in the world to approve the Pfizer/BioNTech coronavirus vaccine. In the meantime, COVID cases have continued to rise globally. Elsewhere, scaling up production of vaccines and distribution could pose a challenge which means the pandemic is likely to remain in 2021. Case in point, the US’ first known allergic reaction to the Pfizer Covid-19 vaccine in the U.S. was reported in Alaska while some snarls emerge to stifle distribution throughout the country, highlighting daunting challenges ahead for a huge and comprehensive immunization drive. Separately, two health workers in Britain suffered similar allergic reactions, prompting a government advisory to avoid getting the shot for those with a history of severe allergies.

Current share price indicating upside potential based on normalized moderating earnings and reversion to pre-COVID mean PER valuation. Based on our sensitivity analysis, assuming ASP normalizes to UD35/1,000 pieces and hence with PER valuation tracking back to pre-COVID 5-year historical forward mean, current glove makers’ share prices are indicating potential upside from here. Note that current latex and nitrile ASP average USD50 and USD90 to USD110, respectively and expected to be higher in 1Q CY21. Although there is limited visibility on ASP in CY22, order-books and lead times suggest that CY22 demand will remain strong, benefitting rubber glove makers immensely from increased demand that is sustainable - a step-up structural change in demand brought by heightened hygiene awareness extending beyond the healthcare community.

Key risks to our calls are: (i) faster-than-expected effectiveness in vaccine inoculation, (ii) lower-than-expected ASP in 2H 2021, and (iii) crowded trades in glove counters.

TOP Pick is HARTA (OP; TP: RM21.00). We like HART for: (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) the stock is trading at 7x FY22 EPS offering 9% dividend yield. At current price, the stock offers 9% dividend yield based on our FY22E forecast. However, due to concerns over COVID-19 cases and hence temporary production disruption, we conservatively trim our TP from RM26.22 to RM21.00 as we attach a 20% discount to our target PER from 19.7x to 15.8x CY21 EPS (closer to -1.0SD below 5-year forward mean).

Source: Kenanga Research - 5 Jan 2021