The shares of glove companies in Malaysia rallied into this week, with Top Glove rising 30.2% to RM2.93, Hartalega increasing 26.5% to RM6.49 and Kossan moving 8% higher to RM2.15 (peaked at RM2.35 on 29 November) as of the close yesterday, from their respective closing prices on 25 November.

Macquarie Equities Research (MQ Research) said the new Omicron wave may result in higher volumes but likely not average selling prices (ASP) of gloves, and that this newsflow injects upside share price volatility. MQ Research raised its price to earnings ratio and target prices for the glove companies in its coverage.

Omicron Sparks Glove Rally

• Share prices of Malaysian glove makers surged on 29-Nov from news the Omicron variant has now spread to North America, Europe, Australia and Asia. (TOPG MK: +21%, HART MK: 13%, KRI MK: +7%, SUCB MK: +16%)

Impact

• Higher volumes could materialise but ASPs unlikely to rise. Omicron reaching new territories + winter beginning in key glove markets US and Europe (65% of total global use) may cause a spike in demand for disposable gloves. Should a fresh wave of Covid-19 infections hit the US and Europe, MQ Research estimates this will result in 5-10% ppt of utilisation rates. MQ Research estimates a 10 ppt increase in utilisation rate would result in 11-13% higher earnings per share (EPS). Glove makers under MQ Research’s coverage are currently operating at sub-optimal utilisation rates (Top Glove: 60-65%, Hartalega: 65-70%, Kossan: 80%). As such, MQ Research believes another wave in Covid-19 infections would only result in higher sales volumes but not increased ASPs, given the ample available supply.
• Emergence of Omicron puts gloves back in the spotlight. MQ Research believes intensifying news flow on Omicron will likely bring incremental buyers to the glove sector, particularly as investors check out of potentially negatively affected sectors (travel, hospitality, consumer discretionary). Note that it took ~2 months for Google searches for the Delta variant to peak. Given news of Omicron broke < one week ago, MQ Research believes share price volatility with an upside bias may remain for some weeks as investors better understand the impact of Omicron (infectivity, hospitalisation, effectiveness of vaccines etc.)
• Raising PE multiples. MQ Research believes Omicron newsflow resulting in glove share price rallies sets a new ‘floor price’ for gloves, given the possibility of future newer variants arriving and igniting similar surges. MQ Research raises its target price to earnings ratio (PER) and target prices (TP) due to (i) potential increased sales volume bump from Omicron; and (ii) heightened upside share price volatility from Omicron news. As long term (LT) ASPs are still uncertain, MQ Research’s PER of 16.5x is -0.75SD pre-pandemic for Top Glove and Kossan. However, MQ Research’s PE multiple for Hartalega of 26x is in line with its pre-pandemic five-year average. MQ Research believes this is justified, as it believes Hartalega have the best cost efficiencies amongst glove players globally and industry leading labour practices. Much of Hartalega’s total shareholder return (TSR) is derived from dividend yield (FY22E: 9.0%) (60% payout ratio) from earnings accumulated on high ASP during the pandemic. MQ Research believes the risk this dividend not being paid out is minimal, as Hartalega have a healthy net cash pile of >RM4bn as of 2Q22. MQ Research’s target PERs are pegged to pre-pandemic years, as heightened ASPs during the pandemic are quickly declining to equilibrium. MQ Research’s ratings and forecasts remain unchanged for all three.
• Recommendation: Kossan (OP) > Hartalega (OP) > Top Glove (N).

12-month Target Price Methodology

• HART MK: RM6.80 based on a PER methodology
• KRI MK: RM3.00 based on a PER methodology
• TOPG MK: RM2.90 based on a PER methodology

Source: Macquarie Research - 1 Dec 2021