PETALING JAYA: Glove stocks on Bursa Malaysia came under profit-taking today after days of rally on fears over the Wuhan coronavirus outbreak.
Despite the retreat, PublicInvest Research believes that their valuations will continue to expand as the absence of a vaccine might lead to the coronavirus being spread to more countries.
“We raise our price-to-earnings valua-tion for Top Glove, Hartalega and Kossan to 43 times, 48 times and 29 times respectively. We also raise our earnings forecast for glove makers under our coverage universe in FY20-FY21 by 3-5% to account for the possible extra orders from China that, in our view, will materialise. We also see slight margin expansion resulting from better bargaining power in the hands of the glove manufacturers,” it said in a research note today.
It has also upgraded the rubber glove sector from “neutral” to “overweight”.
On Bursa Malaysia today, Hartalega Holdings Bhd fell 21 sen or 3.36% to RM6.04, Top Glove Corp Bhd sank 16 sen or 2.67% to RM5.84, Kossan Rubber Industries Bhd slipped 11 sen or 2.2% to RM4.90, while Supermax Corp Bhd was down 8 sen or 4.3% to RM1.78.
PublicInvest Research said glove counters have experienced valuation expansion, historically during other epidemic outbreaks, trading up to +2.0 standard deviation (SD) of their respective five-year historical mean due to market sentiment, coupled with an increase in demand for gloves.
It explained that the trend can be observed during the large outbreak of H1N1 flu from April 2009 to August 2010, where the valuations for both Top Glove and Kossan peaked at +2.0 SD during the tail end of the outbreak.
However, the trend was less apparent during the SARS outbreak from November 2002 to August 2003, as glove makers had much less following back then.
“With the coronavirus outbreak, we are of the view that history might repeat itself and the glove players might trade up to its respective +2.0 SD like the prior H1N1 outbreak.
“While we note that a team of Hong Kong researchers have reportedly developed a vaccine for the coronavirus, it is also noteworthy that the preclinical and clinical studies are likely to take more than a year before it will be fit to use on humans. Therefore, we reckon it will not be so soon that the coronavirus outbreak can be conclusively addressed.”
With the increase in glove demand, the research house believes that there is room for glove makers to ramp up utilisation rate further to 95%, to meet the urgent shipment requests from China.
“We view that Top Glove is likely to be the largest beneficiary from this unexpected demand surge, as it has the strongest capacity growth (+16.8% yoy), while Hartalega and Kossan’s capacity will grow by 9% yoy and 10% yoy respectively in 2020. We are of view that the sudden spike in demand might drive glove average selling price higher, hence resulting in slight margin expansion,” PublicInvest Research said.
