JP Morgan cut GLOVES target price. Supernormal Cycle over? What's your comment?
Date:
2020-12-11
Firm:
JP MORGAN CHASE
Stock:
Price Target:
3.50
Price Call:
SELL
Last Price:
1.32
Upside/Downside:
+2.18 (165.15%)
Firm:
JP MORGAN CHASE
Stock:
Price Target:
3.80
Price Call:
SELL
Last Price:
2.73
Upside/Downside:
+1.07 (39.19%)
Firm:
JP MORGAN CHASE
Stock:
Price Target:
8.50
Price Call:
SELL
Last Price:
3.91
Upside/Downside:
+4.59 (117.39%)
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I am not sure the vaccine is useful or not. CEO have better answer.
Do you have to wear GLOVES to give a vaccine shot?
I am holding my GLOVES. I will only sell when ASP come down but not stock price come down.
I buy vaccine logistic by using the GLOVEs profit as hedging to vaccine news.
- How to distribute the ultra-cold vaccine? I am allocating my GLOVE profit to TASCO Cold Chain to hedge vaccine news
- How to distribute the ultra-cold vaccine? I am allocating my GLOVE profit to FREIGHT to hedge vaccine news
- KGB's dry ice plant to flourish from Pfizer's vaccine success?
I am reproducing the The Edge article to my blog.
This post don't have any value added content.
Compile here for my own record.
Please skip if you don't like it.
https://www.theedgemarkets.com/article/jp-morgan-pegs-these-glove-makers-fair-value-half-their-market-price-says-supernormal-cycle
JP Morgan pegs these glove makers' fair value at up to half their market price, says supernormal cycle is over
KUALA LUMPUR (Dec 11): JP Morgan has reinstated coverage of Top Glove Corp Bhd, but with an underweight recommendation and a fair value of RM3.50 — that's about half its current market price of RM6.90 — as it sees the passing of a supernormal growth cycle for glove makers, in anticipation of a huge oversupply in the market, as glove demand decelerates in tandem with the pace of testing for Covid-19.
Besides the world's largest rubber glove maker, it also initiated coverage of its closest peers Hartalega Holdings Bhd and Kossan Rubber Industries Bhd, also with UW ratings.
It gave a fair value of RM8.50 for Hartalega, down 38% from its last traded price of RM13.72, and a fair value of RM3.80 to Kossan, which is 30% less than its closing price of RM5.39 today.
Its analysts Jeffrey Ng and YY Cheah, in a note to clients today, said they expect glove prices to weaken in the second half of next year.
"Global testing trends have also plateaued, which ought to ease current supply tightness. JP Morgan’s proprietary fund flow analysis indicates the glove sector is a crowded trade, implying significant downside momentum. Near-term concerns on rising costs, plus long-term overcapacity risk, spell downside risks. Once Malaysia lifts the short selling ban, downward pressure could be amplified," they wrote.
In particular, they noted that 13 of 17 highly populated nations’ testing trends have started to trend downwards from their peaks since the end of September. This, they wrote, may be an early indication that glove prices too have peaked, and similarly for producers’ profits and share prices.
They also view the expectation that the use of gloves per capita would double post Covid-19 as "overly optimistic", given global population growth is substantially slower than projected glove capacity growth.
Glove production capacity, they noted, is expected to grow 87% in the next three- to five years from this year’s, with 130 billion pieces per annum capacity to come from the big four glove makers of Top Glove, Hartalega, Kossan and Supermax Corp Bhd, and 20 billion pieces more from non-conventional players.
“The most worrying factor is oversupply, as we see not only significant capex plans from the big four producers but also from new players. While it is hard to measure the potential oversupply, we can take a leaf from the crude palm oil industry which saw a decade of oversupply post a supernormal cycle in the early 2000s,” they noted.
Additionally, glove makers' profitability is expected to be negatively affected by higher raw material prices and rising labour costs. "Pressure on foreign workers' treatment has and will continue to lift opex. Board members of certain glove producers have also asked for a raise in board fees. All these will add to higher opex and erode margins," they wrote.
Amid all this, they think the upside potential for glove stocks may be capped, with retail and foreign participation having reached all-time highs.
Malaysia’s government linked funds are the only hope to lift the sector, they wrote, yet they have also been trimming their exposure recently.
"The market cap of the top-four producers is RM170 billion, equal to 66% of local non-government-linked funds’ AUM (asset under management). Our proprietary analysis shows most funds have exposure in gloves and their cash holdings are low. To date, local mutual funds have invested 11% of AUM in gloves. Retail and foreign participation are at all-time highs. It is thus difficult to find incremental dollars to drive this sector higher," the note read.
Meanwhile, they noted that Top Glove and Hartalega's capital management decisions have not been optimal for creating value for shareholders due to the focus on accelerating capex via cash to support capacity growth.
“Despite the strong cash generation in the next 12 months, Top Glove has guided that it will maintain a 50% dividend payout, as it aims to increase its capex to RM2 billion per annum for the next five years, a four times increase relative to its historical average. Utilising equity at a cost of 7.7% versus cost of debt of less than 5% to fund capex, in our view, is not optimal to shareholders’ value creation,” it explained.
Similarly, Hartalega's management has guided that it would increase its capex by 2.3 times in the next three years, compared with the financial year ended March 31, 2017 (FY17) to FY19.
The analysts believe Hartalega could unlock more value if it uses its debt to fund capex, as its cost of equity of 7.8% is higher than its cost of debt of 2.5%. "Management has also guided that it will only maintain its 60% dividend payout for the next three years, despite the strong cash generation and supernormal cycle," they added.
Among risks to JP Morgan's sector call is a second global wave of Covid-19 cases, and any unplanned glove production disruption that could create supply tightness — both of which could lift glove prices to new heights.
A relaxation of foreign worker policy or cut in worker levy would also improve profits, so would any greater-than-forecast drop in nitrile and natural rubber prices.
Further challenges to its sector call would be a significant step-up in dividend payout plus capital repayment that would lighten the glove makers' balance sheet, and a substantial depreciation of the ringgit that would improve reported profit, as gloves are sold on US dollar terms.
Discussions
Be the first to like this. Showing 23 of 23 comments
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Sept 2020- Nta Rm 2.75
June 2019- Nta Rm 2.62
Dec 2018- Nta Rm 2.54
Dec 2017..Nta rm 2.49
Dec 2016 ...Nta Rm 2.18
Dec 2015..Nta Rm 1.96
Dec 2014..Nta rm 1.82
Dec 2013 nta..rm 1.71
Dec 2012 nta ..rm 1.51
Dec 2011 nta..rm 1.38
Dec 2010 nta...rm 1.22
Dec 2009 nta ..rm 1.14
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2020-12-12 22:56
Take Topglove as an example,
3 times PE? Dividend yield = 19%? Would really like that.
2020-12-12 23:37
SUSTAINABILITY IS THE KEY LOH....!!
THE DURIAN RUNTUH PROFIT IS OVER MAH...!!
Posted by supersaiyan3 > Dec 12, 2020 11:37 PM | Report Abuse
Take Topglove as an example,
3 times PE? Dividend yield = 19%? Would really like that.
2020-12-12 23:39
SOHAI LOH....PALMOIL TAKES 6 YEARS TO BEAR FRUITS BUT GLOVES TAKES 9 MTHS TO START PRODUCTION MAH...!!
WHO IS LIKELY EASIER TO OUR PRODUCTION LEH ?
PALMOIL IS PERISHABLE CANNOT KEEP....BUT GLOVES NOT PERISHABLE & CAN KEEP...WHO IS LIKELY & EASIER TO OVER SUPPLY LEH ??
OF COURSE GLOVES MAH....CAN BE EASILY STOCKED UP BCOS NOT PERISHABLE MAH..!!
"JPM: We can take a leaf from the crude palm oil industry which saw a decade of oversupply post a supernormal cycle in the early 2000s
Rebuttal: Comparing glove with palm oil is again nonsense. Palm oil oversupply is unavoidable as the FFB (which is perishable) from the increased planted acreages have to be converted to oil. But glove manufacturers can shut down production lines when demand drops. So increased capacity does not have to mean oversupply.
And glove is not a commodity like palm oil. The health and medical segment accounts for 69.4% of global glove sales and gloves for this segment command a premium price as quality is crucial. Hence, buyers are less likely to change suppliers and concomitantly price is also less likely to drop. Therefore, the established large glove supplies will have a great competitive advantage over new entrants."
13/12/2020 12:00 AM
2020-12-13 00:02
THE DEMAND FOR GLOVES ALREADY PEAK, COUPLE WITH SHARP INCREASE IN CAPACITIES & COMPETITIONS & VACCINES COMING WHICH IS A RECIPE FOR SHARE PRICE COLLAPSE FOR GLOVES COMPANIES LOH!!
TheStar Sat, Dec 12, 2020 08:10am - 1 day ago
Peak gloves
WHEN the price of crude oil was onward to its historical highs, we were introduced to the phrase “peak oil.”
Peak oil was to show how production of crude oil was at its high and why the world will not see oil gushers in the frequency it has in the past. Well production did rise, given the historic prices that made marginal fields, deepwater and fracking viable.
But demand unfortunately did not keep up because the high prices meant the world started looking at alternative and renewable energy.
Like high oil prices back in the day where the oil majors were sloshing in cash, the same now may be said of our glove manufacturers.
The role and importance of gloves cannot be understated in the global fight against the Covid-19 pandemic although there is much room for improvement in terms of how some in the industry handle the welfare of their workers.
Top Glove Corp Bhd’s extraordinary profit of RM2.38bil in the first quarter of its 2021 financial year was symbolic of high demand and prices, and it was more than the RM1.87bil it made for the whole of its 2020 financial year.
There is no doubt other glove companies will be making super-normal profit for some time but it will be unfathomable to expect that trajectory of profit increases to continue.
As the world starts rolling out vaccines and as more people get inoculated against Covid-19, then the catalyst for the huge profits would increasingly get muted. The argument that the vaccine rollout will require the use of gloves is true but much of that will be one time use. The world has a population of 7.8 billion people and 16 billion pieces of gloves, or 32 billion if there needs to be two injections, to administer a vaccine to each and every person. Top Glove alone makes way more than that.
Then there is competition from new suppliers. Germany is starting to make rubber gloves seeing the demand and profits companies are making, which would indicate that the barriers of entry are not high for a business that can be automated to a way larger degree than it is in Malaysia. Then there is the production increase from existing manufacturers and new players just in Malaysia that are entering the business.
The glove players will make more money than prior to the pandemic but how will the supply dynamics change and prices react will bear watching over the long run.
2020-12-13 10:51
Warning!!!!
Quickly leave gloves immediately...!!
Danger Tsunami is coming loh...!!
2020-12-13 11:42
https://www.klsescreener.com/v2/news/view/758141/Top_Glove_estimates_dividend_yield_to_be_more_than_6_in_FY21_chairman
top glove dividend yield 6-7% at current price... FYI .. will top up more if drop till 6.00 .. better than putting in EPF
2020-12-14 11:33
Stockraider is pissing his doom day for Gloves stocks with long illogical writing.
Waste of time. WTF you want? Grinding the crap so we sell and buy Banks Stocks? F off lah...
2020-12-14 11:58
Top Glove reports death of worker due to Covid-19, first since outbreak at firm
(December 14, 2020 11:56 am +08)
KUALA LUMPUR (Dec 14): Top Glove Corp Bhd has reported that a worker died on Saturday due to Covid-19, the first death since the outbreak at its dormitories and factories in October.
##https://www.theedgemarkets.com/article/top-glove-reports-death-worker-due-covid19-first-outbreak-firm
2020-12-14 12:02
Biasalah.
JP Morgan missed the gloves bull so they very sour grapes just like those here who missed the glove bull. JP Morgan very red eye and jealous see other ppl make money from gloves, so JP Morgan throw tantum and spew out negative remarks about gloves.
Biasalah!
2020-12-14 13:05
Tesla PE 1000x how come JP Morgan never downgrade to sell? WHY? WHY? Why double standard when it comes to our beloved country Malaysia? Just when Malaysia got something the West dont have, they envy, they jealous, they talk bad about our gloves. Just like Palm Oil. The West dont have Palm Oil so they bash our Palm Oil
2020-12-14 13:07
PN govt should goreng up the gloves sector just to give a tight slap to the face of foreign JP Morgan and Macquire who think they are superior to us local Malaysians
2020-12-14 13:08
smart ppl left gloves already when record covid cases & record profit didn't cheer the share price, let those 傻蟹 trapped inside. lol
2020-12-14 16:17
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katsul51
In order for us to accept the price downgrade to RM 3.50 could JPM gives the previous price target coverage so that we can compare the change in the revision and its associated assumption then and now.
2020-12-12 22:17