PETALING JAYA: Gloves companies earnings will be pushed further as selling prices continue to soar in the next 12 months as lead time stretches up to 12 months according to AmResearch.
“This will be driven by expanded margins as raw material prices remain low, selling prices continue to grow, US dollar continues to strengthen over the ringgit and expansion plans remain intact for the glove producers,” it said in a report.
With that, the research house stated it is maintaining its overweight call on the sector, and is projecting the ringgit to trade against the US dollar at an average of RM4.29 in 2020 and RM4.25 in 2021.
“We think that a stronger ringgit will even help further expand net margins for glove companies because unlike pre-Covid-19 times, cost savings are not passed through to customers due to supply constraints,” said AmResearch.
It also pointed out that glovemakers are expecting glove demand to increase by approximately 30-50%, from 8-10% before the pandemic. The higher demand has resulted in a shortage of supply, pushing up average selling prices (ASP) for these medical gloves.
The research house relayed that the ASPs are trending upwards and glovemakers now guide for around 5–15% quarter-on-quarter (qoq) gradual increases while spot selling prices for gloves skyrocketed 100–400% in the past few months as panic buying of gloves ensues.
In that regard, it has raised its ASP assumption for the sector by around 2-9% on the belief that selling prices will continue to grow in 2021 as a vaccine for Covid-19 is expected to take roughly 12-18 months to create.
“Beyond Covid-19 pandemic, we anticipate a structural change in the way gloves are used, forming a new normal where glove usage per capita will increase as hygiene measures become stricter,” said AmResearch.
It elaborated that these changes will not be limited to the healthcare sector but also across different industries like food & beverage.
For the counters in the sector, it maintained a buy call on Top Glove with a fair value (FV) of RM17.38 from RM12.23. Its earnings forecast has been raised by 21% for FY20 and by 71% for FY21.
The research house said it is increasing its FY21 ASP by 2% to US$29, as it believes the higher selling price will be sustained for another year before falling post-Covid-19 pandemic.
It has also retained its buy call on Kossan Rubber Industries Bhd with a higher FV of RM11.05 from RM9.72 previously, and raised its FY20 ASP by 8% to US$26 as it expects a 10–15% jump in selling prices for Kossan in the second half.
On the other hand, it has upgraded its call on Hartalega Holdings Bhd to hold from underweight with a higher FV of RM12.43 from RM7.37.
“We increase our FY21 ASP by 9% to US$29 as we believe the higher selling price will be sustained for another year before falling post-Covid-19 pandemic. We keep our ASP assumption of US$26 for FY22,” it said.
Source The Sun Daily