Thumbs up for glove stocks earnings growth

PETALING JAYA: The stage is now set for rubber glove stocks for a solid FY20 with a recovery in volume growth following three quarters of anaemic quarterly earnings growth, according to Kenanga Research.

“Coming off this low base due to the lacklustre demand of the past 12 months, forward earnings growth will amplify as restocking activities ramp up on the current outbreak of the Wuhan virus which enforces higher hygiene standards,“the research house said in a sector update.

All in, it raised its valuations from +1.0 standard deviation (SD) to +1.5SD to better reflect rubber gloves players’ prospects in anticipation of restocking activities, resilient earnings and their constant evolution and progress to increase earnings.

Despite easing off from recent peaks, rubber glove stocks remain strong outperformers year to date, led by Supermax Corp Bhd (+18%), Top Glove Corp Bhd (+20%) Kossan Rubber Industries Bhd

(+13%) and Hartalega Holdings Bhd (+6%).

“We believe rubber glove stocks deserve further re-rating and should trade at their previous peak price-to-earnings valuations given the re-stocking activities ramp-up as the current outbreak of the Wuhan virus enforces higher hygiene standards; uptick in average selling prices (ASPs) as most players are running at high utilisation rate of 80-90% since most players have cut back on production following concerns of oversupply in 2019; and margins expansion emanating from higher ASPs since players have scaled back and slowed down on expansion in 2019.”

Kenanga said telltale signs of demand outstripping supply could potentially lead to higher ASPs. Looking at the stable raw material price, ceteris paribus, a hike in ASPs is expected to lead to margin expansion.

The research house said even before the Wuhan virus crisis set in, there were nascent signs of a solid uptick in demand for rubber gloves in coming quarters. The third quarter of 2019 results season indicated a positive recovery in demand and hence volume growth from Top Glove and Hartalega. Both players recorded 6% and 14% sequential volume growth, respectively.

Based on its analysis, Kenanga expects nitrile gloves to continue growing and expropriating market share from latex gloves.