Glove counters peaked?

KUALA LUMPUR: Some market observers believe glove counters are peaking, owing to the elevated average selling prices (ASPs) for rubber gloves.

They said Bursa Malaysia would not be dragged down if investors were to switch from glove counters to other sectors.

The likes of AmBank Research expects the ASPs to begin tapering off in the first quarter (Q1) of 2021, while CGS-CIMB views the downside risks for the glove manufacturer included the discovery of the Covid-19 vaccine.

CGS-CIMB analyst Walter AW said this would lead to weak sentiment for the stocks and stiffer-than-expected pricing competition.

AmBank Research said the share prices of most glove companies had exceeded its target prices.

This prompted the firm to downgrade its call on the glove sector from “overweight” to “neutral”,.

The glove counters include Top Glove Corp Bhd (Top Glove), Kossan Rubber Industries Bhd (Kossan Rubber), Hartalega Holdings Bhd (Hartalega) and Supermax Corp Bhd (Supermax).

“We believe at the current share price levels, the valuations for glove companies under our coverage have fully priced in the companies’ earnings outlook,” it said.

Ambank Research has maintained its earnings forecasts for the sector, assuming Covid-19 vaccines could only be commercially available by the second half of 2021.

The firm, neverthless, said gloves sales would continue growing next year with a structural change in the way gloves would be used.

“There will be a new normal where glove usage per capita will increase as hygiene measures become stricter.

“There are opportunities in emerging markets such as China and India as glove consumption is low between two and six units per capita, compared to 100 to 280 gloves in developed countries,” it added.

MIDF Research analyst Ng Bei Shan, meanwhile, said demand for gloves would remain strong at least in the next two quarters, driven by the high number of active Covid-19 cases globally.

“A plunge in ASP due to the shift in supply-demand dynamics, hike in raw material prices and disruption in operations could hamper the growth of the sector,” said Ng.

UOB Asset Management (Malaysia) Bhd chief investment officer Francis Eng said the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) would not be dragged down if customers were to shift their investments from glove to other sectors.

“The gloves stocks only account between 17 per cent and 18 per cent of the FBM KLCI weight. We have another 82 per cent to 83 per cent of the market form by other sectors,” he said.

If some investors started changing to the remaining 82 per cent to 83 per cent of the market, it could even out or have a positive impact, as the other segment of the market was much larger, Eng added.

He said there were sufficient signs of Bursa ‘s recovery going into 2021.

He said returns would be more modest going forward and investors should employ selective stock-picking strategy to get a decent return from the equity market.

“Over the mid to longer term views, equities have shown they have the ability to generate positive returns with dividend yields, averaging over three per cent. So there is potential for capital appreciation as well.

“The fixed deposit rates are expected to remain low in the long-term between 1.7 per cent and 1.8 per cent as it would take a while for us to fully recover from the pandemic,” he added.

UOB Asset Management chief executive officet Lim Suet Ling said strong-performing stocks in the healthcare sector had helped to moderate the drop in the FBM KLCI in the last few months.

“Looking forward, an active stock selection strategy will be key in identifying quality stocks to make up a portfolio that can help local investors ride through the market volatility.

“We see potential in stocks not only from healthcare, but also the technology sectors for their earnings momentum, as well as the utilities sector for their defensiveness and dividend yield,” she said.

As at 5pm on Aug 26, Bursa’s healthcare’s index settled at 4,188.24 points, or 0.98 per cent higher.

Glove stocks, which were part of the healthcare sector, had seen a marginal increase with Top Glove rising 3.7 per cent to RM26.34, Kossan going up 4.51 per cent to RM15.30, Hartalega at RM16.76 or 1.58 per cent higher, and Supermax at RM21.28 or 7.47 per cent increase.

The FBM KLCI index settled at 1,549.58 points, or 5.38 points lower. Top Glove, Supermax, Rubberex Corp Bhd and Kossan among the top gainers.

Source: NST