KUALA LUMPUR (April 16): Glove shares continued to trend higher today as Covid-19 resurgence concerns linger.

At noon break, Supermax Corp Bhd rose 11 sen or 2.16% to RM5.21. Compared to its recent trough of RM3.81 on March 31, the counter has rebounded 36.75%.

Its peer Top Glove Corp Bhd also gained four sen or 0.74% to RM5.48. It has risen 21.24% from its recent low of RM4.52 on March 31.

Its smaller peer Careplus Group Bhd, meanwhile, advanced 11 sen or 5.73% to RM2.03. It has surged 61.11% from its recent low of 1.26 on April 5.

Rubberex Corp (M) Bhd went up eight sen or 5.84% to RM1.45. It has gained 43.56% from its recent trough of RM1.01 on March 31.

Comfort Gloves Bhd climbed eight sen or 3.01% to RM2.74. It has soared 45.74% from its recent low of RM1.88 on April 5.  

Hartalega Holdings Bhd and Kossan Rubber Industries Bhd, however, fell on profit taking, after rising this morning.

Hartalega slipped one sen or 0.1% to RM9.99, while Kossan slid three sen or 0.79% to RM3.77.

Nevertheless, compared to its recent trough of RM8.93 on March 31, Hartalega has gained 11.87%. Kossan has also risen 18.18% from its recent low of RM3.19 on April 5.

Citing the World Health Organization, Bloomberg reported that Europe has surpassed one million deaths from Covid-19 and the situation remains “serious”, with about 1.6 million new cases reported each week in the region.

Malaysia also saw the new Covid-19 cases increased further yesterday to breach the 2,000 mark with 2,148 cases. The last time the country registered daily new infections above the 2,000 mark was on March 5 with 2,154 cases.

TA Securities said in a note today that healthcare stocks led by rubber glove manufacturers surged yesterday, with the sector index up a robust 3.3%, sparked by fears that another aggressive wave of Covid-19 cases worldwide may force more lockdowns in global hotspots.

“Healthcare, especially top rubber glove makers such as Top Glove, Supermax, Hartalega and Kossan, should continue to outperform the broader market and attract bargain hunters, with the global resurgence in Covid-19 cases to cement strong demand for their products given the threat of exponential infections from more virulent strains,” it said.

JP Morgan, however, sees downside risks for the glove sector on lower average selling price (ASP).

Its analyst Jeffrey Ng and YY Cheah said in a report yesterday that glove ASPs have hit an inflection point earlier than markets have expected as glove companies have guided to Nitrile May 2021 ASP of US$90-95/1000, 17% to 22% lower than the peak ASP in January 2021.

“Consequently, we find the apparently cheap FY21 price to earnings (P/E) [of] 4 to 8 times deceptive.

“Our thesis is that markets are looking ahead, efficiently discounting the risk of weaker future glove prices, which we estimate recurring ASP of US$30 range, 36% higher than the pre-Covid-19 ASP,” they said.

Applying Malaysia’s glove sector 2016 to 2018 mean valuation of 18 times as benchmark, they estimated current share prices imply FY22 glove ASP of US$29 for Kossan, US$33 for Top Glove and US$38 for Hartalega.

“As such, Hartalega and Top Glove still have downside risks. 1% fall in ASP will translate to 3% to 4% profit cut for Top Glove and Hartalega,” they said.

They also said current glove prices of US$90 are 4 times higher than pre-Covid-19 levels.

“Our base glove price for 2022 is about US$30. Our FY22 target P/E on Top Glove, Hartalega and Kossan Rubber is 18 times, which implies valuation mean reversion as supernormal growth fades,” they said.

According to them, the short-term glove rally is unsustainable.

“The glove sector has bounced 15% to 20% from the recent low on fears of a fourth wave of Covid-19 resurgence, apparently driving domestic funds to cover under weigh positioning in the space.

“Domestic retail traders have been a constant buying force. We do anticipate fundamental drivers to overshadow these influences. New capacities are coming on stream on a monthly basis from China and Malaysia, easing the demand supply tightness. This had led to ASP softening quicker than expected,” they said.

They also noted post-Covid-19 margins remain uncertain.

“Labor issues have structurally lifted labour costs. While nitrile cost has risen alongside with glove ASP, no one is certain on how the nitrile cost will fall alongside glove ASP weakness. This is a risk that has yet to be fully factored in, in our view,” they said.