CGS-CIMB Research analyst Ong Kang Chuen has maintained his positive view on the rubber glove sector, following a session with the Malaysian Rubber Glove Manufacturers Association (MARGMA) at InvestSG this week.
He noted MARGMA remains upbeat on prospects for the sector, and expects global rubber glove demand to reach 360 billion pieces in FY2020, followed by a further 15-20% growth to about 440 billion pieces in FY2021.
Even with the Covid-19 pandemic fully under control, MARGMA sees sustained growth in the coming years, considering the need to replenish glove inventory levels especially in neglected sectors such as industrial, F&B, electronics, and increased glove usage, given higher hygiene awareness.
See: How much better will UG Healthcare fare in the coming quarter, ask analysts who believe the best is yet come
MARGMA also believes that the global glove shortage situation will still persist in 2021F. It notes that while global glove demand has surged in recent months, capacity growth will take time to catch up, as setting up a production line takes between 1 and 1.5 years. Currently, due to the supply shortage situation, order lead times for gloves have risen to 8- 10 months, compared to 1.5-2 months pre-Covid-19.
As such, he believes average selling prices (ASP) could remain 50-60% above pre-Covid-19 levels by 2023. Currently, ASP’s are at about US$70-80 per thousand pieces of gloves, some 200% higher than pre-Covid-19 levels.
Amid the strong glove demand and rising raw material costs, glove companies are seeing a further price hike trend in the coming months. MARGMA thinks that while pricing will eventually stabilise in tandem with better demand-supply dynamics, this will be a “gradual process”, and estimates that ASPs could still remain about 50-60% above pre-Covid-19 levels by 2023.
Taking all these into account, he has given the sector a “neutral” call, but emphasises that this was “mainly premised on near-term share price volatility given recent vaccine development newsflow.”There remain regulatory, manufacturing and logistic hurdles to the widespread availability of Covid-19 vaccines.
For more stories about where the money flows, click here for our Capital section
Nevertheless, he remains positive on the fundamentals of glove makers as profits are set to continue growing through 2021F.
As for specific companies, Ong has recommended “add” on both UG Healthcare and Riverstone with target prices of $1.70 and $2.50 respectively, but UG remains his preferred pick.
This is given its relatively cheaper valuation and his expectations of higher normalised profits, backed by a 59% y-o-y manufacturing capacity expansion in CY2021.
As at 12.21pm, shares of UGHC and Riverstone were trading at 68 cents and $1.35 per share, with a dividend yield of 1.77% and 3.91% respectively.
