Tuesday, 7 July 2020

Glove Makers: Who is Leading?



Earnings by glove makers are well above expectations. AmInvestment Bank Bhd’s research team noted that Malaysian glovemakers expect glove demand to increase by roughly 30 to 50 percent in the next 12 months. This is a sharp contrast to 8 to 10 percent increase pre-Covid-19.

Sector EBITDA margin has also improved amid Covid-19. This is due to higher economies of scale, higher Average Selling Prices (ASP), and lower raw materials costs with nitrile (-6.6%) more than offsetting latex cost (+3.4%).

Malaysia has so far contained the spread of Covid-19, with the number of daily new cases recorded are below double digits since 5 June 2020. But this did not hold back the market demand for gloves. The WHO on 21st June reported the largest single-day increase in Covid-19 cases worldwide, at more than 183,000 new cases over a 24- hour period. As some view we are in a recovery phase, nevertheless, the pandemic could get worse.

To perform an industry comparison, we picked six glove companies listed on the Bursa Main Board and the ACE market, and these are as follows: -

1. Careplus Group Berhad
2. Comfort Gloves Berhad
3. Hartalega Holdings Berhad
4. Kossan Rubber Industries Berhad
5. Supermax Corporation Berhad
6. Top Glove Corporation Berhad


Topglov, the front runner of the industry, had about 40% market share in 2Q 2019 and this increased to 45% in 2Q 2020. The company’s revenue and net income soared 42% and 366% y-o-y, respectively. It is also the company with the greatest improvement in net profit margin: from 6% to 21%, almost four times higher on y-o-y basis!

                                      1. Share Price: Share price on 22 June 2020
                                      2. EPS (E): Estimated EPS with 2Q 2020’s EPS to be maintained for next four quarters

Using the share price of 22nd June, Harta has the highest PE whereas Comfort has the lowest. Glove demand is expected to be sustained over 2021. Based on this, and assuming each stock’s EPS for the next four quarters remains the same as the latest quarter (2Q 2020), the top three value stocks with lowest forward PEs are: 1. Comfort, 2. Topglov and 3. Supermx.

With increased awareness of the importance of good hygiene, the demand for gloves is expected to grow even after the pandemic. However, ASP pricing potential may have reached its ceiling. This is because more companies are now planning to expand their capacities. Also, the spike in demand arising from Covid-19 is temporary. Over the past 30 years, many epidemics or pandemics – including SARS, Swine Flu, H1N1, Bird Flu and Ebola — occur ever so regularly, about once every five years. Covid-19 is part of this repeat cycle.

Disclaimer
We are not recommending any particular counter nor accept any liability or loss for the stocks mentioned above.


Reference:

1.   AmInvestment: Glove selling prices will continue to soar for the next 12 months, 3 June 2020, The Edge Malaysia
2.     Rubber Gloves – Malaysia – 1Q20 Report Card, UOB Kay Hian Research


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