With latex prices softening in the near term and the possibility of a surge in demand should the H7N9 outbreak develop into a pandemic, sentiment towards the glove sector should remain positive. We maintain our Buy call on Top Glove and Supermax as both companies would be the prime beneficiary of falling latex prices and are well positioned to capture the additional demand arising from a possible H7N9 pandemic.

♦  A brewing pandemic? China recently confirmed four new cases of the H7N9 avian influenza, increasing the number of confirmed cases to 91, including 17 fatalities. While we believe that the 3-18% spike in glove manufacturers’ share prices over the last three weeks could have resulted from the spate of H7N9 reported cases, the situation is still confined within China and has yet to escalate into a pandemic as there has been no evidence of human-to-human transmission so far.

♦  Worst may be over but still no turnaround in sight. Our channel check revealed that most glove companies have experienced higher order enquiries, although most of this had yet to be translated into purchase orders. While we believe it is still too early to determine the potential impact of the outbreak, further deterioration of the situation could result in a pickup in demand for gloves, particularly in the natural rubber gloves segment as latex gloves are more commonly used in emerging countries such as China. Should the situation deteriorate and remains prolonged, we believe Top Glove and Supermax would benefit most from any surge in demand due to their spare capacity (average utilisation rate of 75% and 80% respectively).

♦  Valuations rolled forward. We rolled-forward our valuation base year to CY14 from CY13. Consequently, our fair value for Top Glove and Supermax has been raised to RM7.11 (from RM6.42) and RM3.30 (from RM2.68), based on unchanged target PER of 15.5x and 13x respectively. We maintain our Buy call on Top Glove and Supermax as both companies would be the prime beneficiary of falling latex prices (given its larger proportion of latex gloves in its product mix) and are well positioned to capture the additional demand arising from a possible H7N9 pandemic. We also maintain our Buy call on Kossan based on a revised fair value of RM4.15 (from RM3.73). Moving forward, demand growth for gloves would continue to remain resilient as it remains the most basic and affordable form of protection against viruses and disease outbreaks. Furthermore, with latex prices softening in the near term and the possibility of the H7N9 outbreak developing into a pandemic, sentiment towards the glove sector should remain positive over the next quarter. As such, we maintain our Overweight call on the sector

Source: RHB