The market is likely to see a shortage of 10.8bn pcs of rubber gloves for 2020 amid new demand from the coronavirus and the US influenza season. The recent virus outbreak is expected to drive demand growth for rubber gloves for the year, with earnings growth for glovemakers likely to be stronger in the coming quarters.

Macquarie Equities Research (MQ Research) has a more positive view on the Malaysian rubber glove sector amid the coronavirus outbreak, with Top Glove being the top pick with its target price increased to RM7.35 and Hartalega upgraded to outperform.

Event

• MQ Research has a more positive view of the Malaysia rubber glove sector from neutral to overweight. Earnings growth is likely to be strong in coming quarters due to supportive demand growth from Coronavirus and the US influenza season. MQ Research estimates new demand would result in a shortage of 10.8bn pcs in 2020. The strong expected quarterly earnings into 1Q/2QCY20 period onwards should rerate the stocks to +1.5SD price to earnings (PE). MQ Research’s top pick is Top Glove with a higher target price of RM7.35.

Impact

• Coronavirus drives rubber glove demand. Coronavirus took only 1.5 month to reach more than 16,000 infections, faster than SARS and H1N1. WHO declared Coronavirus a global health emergency on 30-Jan. MQ Research expects the fear for coronavirus to continue to increase demand for rubber gloves globally as other countries step up their preparedness for the further outbreak. To-date, based on MQ Reserch’s checks all the top five manufacturers have received urgent orders from China and HK and the orders are quite sizeable.

• US flu season also increase glove demand. United States is experiencing one of the worst flu seasons in five years. Percentage of medical visits for influenza like illness continues increasing (Fig 9). The US practice is to use medical gloves during entire care for a patient. Demand from the US flu season is expected to increase until April/May, the typical period of low flu activity.

• Expect a glove shortage in 2020. MQ Research expects Coronavirus and the US flu season to drive global demand growth at 13% y-y. As a result, MQ Research estimates the market will experience a shortage of 10.8bn pcs in 2020. Pricing power will likely start to tilt towards manufacturers and lead to a margin expansion.

• Valuation spike ahead. MQ Research sees sector PE multiples to increase as a result of the improved earnings outlook due to strong demand driven by Coronavirus and the US flu season. MQ Research’s analysis of earnings and share prices shows a strong correlation of glove producers’ share prices and their earnings. MQ Research expects disease-driven demand will only reflect in 1Q/2Q CY20 results, as most of the orders are delivered in Feb onwards.

Outlook

• MQ Research has a more positive view of the glove sector, as the Malaysian glove players are benefitting from the ongoing Coronavirus and the US influenza outbreak. MQ Research’s top pick is Top Glove, which has the most capacity addition in 2020E and biggest beneficiary of Coronavirus, with an increased target price of RM7.35 (from RM4.97). MQ Research also raises its target price on Hartalega to RM7.10 (from RM4.05) and upgrade to Outperform from Underperform. With the strong demand, both companies are poised to deliver stronger quarterly earnings in 1Q/2Q CY20.

Source: Macquarie Research - 4 Feb 2020