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Trend reversal for glove stocks on Bursa Malaysia expected

27 May 2020 / 19:51 H.

PETALING JAYA: Despite persistent buying momentum in glove makers, glove stocks could see a pullback as early as tomorrow, as it has shown an inverted hammer candlestick pattern that normally signals the end of an uptrend, based on technical analysis.

“They (glove stocks) can continue (to drive the market), but we will see a pullback first, because the climb has been very strong since early this year. In the longer term, there is still room for growth,“ Inter-Pacific Research analyst David Lai told SunBiz.

However, he reckoned that not all glove stocks will continue to climb.

“In terms of valuation growth, those that are able to show strong earnings growth in the coming six months and those with a more diverse customer base deserve such premium and will continue their momentum upwards. Glove companies with limited capacity or those operating at high utilisation rate before the outbreak – their valuation has outweighed their earnings growth potential,“ he said.

He added that increasing average selling prices (ASP), coupled with lower raw material prices and lower energy costs, should all in see a margin improvement by every glove player, although the magnitude of the improvement depends on each glove maker’s customer profile.

Malacca Securities noted that many of the lower liners and broader market shares are on the pullback phase after an extended overbought streak.

“We think that some nibbling may take place, but the meteoric trading interest in healthcare-related stocks may soon take a breather.”

Glove stocks continued to be among the top 15 gainers on Bursa Malaysia yesterday, including Supermax Corp Bhd (+RM1.15), Top Glove Corp Bhd (+RM1.04), Hartalega Holdings Bhd (+88 sen) and Kossan Rubber Industries Bhd (+42 sen). The healthcare index on Bursa Malaysia continued its upwards trend, rising 7.47% to 2,169.41.

After a two-day break for Hari Raya Aidilfitri, the FBM KLCI jumped to close 1.04% higher at 1,451.73 yesterday.

Overall market breadth on Bursa Malaysia remained positive, with gainers leading losers 582 to 406. Total volume increased to 7.19 billion shares worth RM4.78 billion from 6.68 billion units worth RM4.19 billion last Friday.

Leinvest Plt chief investment officer William Ng said glove stocks are “hot”, overpriced stocks with huge order book and increasing ASPs, riding on the current sentiment that is still struggling with the absence of a vaccine for Covid-19 and the conditional movement control order.

“Gloves are the most solid business that is not affected by this incident (Covid-19) and their recovery is the fastest. Technology, utility, telco, government-linked companies can also push it (the market), but the economy is not good now,“ Ng said, adding that oil and gas stocks can make a comeback if the oil price stabilises at US$40-60 a barrel.

CGS-CIMB said yesterday Top Glove, as the largest glove maker globally in terms of production capacity (73.8 billion pieces per year), is the key beneficiary of the favourable supply and demand dynamics in the glove sector currently, allowing it to capitalise on pent-up demand due to Covid-19.

The research house has turned more positive on Top Glove’s earnings prospects as it expects more aggressive ASP increases, leading to stronger margin expansion. In its new forecast, it believes Top Glove will be able to raise its ASPs by 10% per month from June to December 2020, versus 5% per month between June and October 2020 in its previous forecast.

“We gather that Top Glove’s current order lead time has further extended to 11-12 months (versus its assumption of eight months previously), which gives Top Glove a longer order book visibility to up to May-June 2021. This is given the favourable supply-demand dynamics in the glove sector (owing to Covid-19). We understand that Top Glove is witnessing stronger demand from its existing customers and new customers (mainly end customers such as government and non-government organisations),“ said CGS-CIMB.

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