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Author: gloveharicut   |   Latest post: Wed, 25 Nov 2020, 7:03 PM

 

Can the glove stocks hold steady?

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I am reproducing the The Star article to my blog.

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https://www.thestar.com.my/business/business-news/2020/10/10/can-the-glove-stocks-hold-steady

EPF glove stock cht

 

THE raging bulls that have powered the uptrend momentum in the stock market are now in hibernation mode after an impressive speculative run that was fuelled by ample liquidity which brought retail investors back to the market.

A race, no matter how intense, will eventually lead to the finish line and this has seen retailers toning down on their aggressiveness on the local bourse in the final quarter of the year when uncertainties took centre stage. There was the end of the six-month moratorium, Malaysia’s political uncertainties, the upcoming United States presidential election and the root of the chaotic 2020 - the Covid-19 - which is evoking a third wave with the rising number of cases.

For want of something certain in a period marred with uncertainties, the glove makers are still the companies with seemingly the most attractive propositions.

Big drivers: Products and services that facilitate health and safety will remain in demand as the world continues to gradually recover socially and economically, according to an analyst. - AFP

Big drivers: Products and services that facilitate health and safety will remain in demand as the world continues to gradually recover socially and economically, according to an analyst. - AFP

During the six-month loan moratorium period from April to September, many went against one of the holy grails of investing, that is not to chase stocks. The fear of missing out seemed to have worked then because the more they chased the rubber glove counters, the higher it climbed.

Covid-19 has delivered a bashing beyond recognition on global economies but the one consolation it brings about is being the catalyst for the rubber glove uptrend.

Just when everyone thought that the value of glove stocks had peaked, anecdotes about the prevalence of Covid-19 infections are sending their values even higher.

Going by historical price to earnings valuations, Hartalega Holdings BhdTop Glove Corp BhdSupermax Corp Bhd and Kossan Rubber Industries Bhd are trading at lofty values of 105,37,48 and 60 times earnings respectively.

Hartalega and Kossan have seen a tripling of their share prices year-to-date (y-t-d), while Supermax has shot up by a massive 14 times. Top Glove rose 4.6 times in that period.

Yet, over the past few weeks, the Employees Provident Fund (EPF) has been a net buyer of some glove stocks on Bursa Malaysia and on the Singapore Exchange (SGX).

Taking on a conservative assumption where the EPF buys low and sells high, it has spent close to RM500mil just on rubber glove counters over the past month.

It has raised its stake in Top Glove to 5.46% from 5.09% a month ago and inched up its holdings in Kossan by more than 1% to 8.53%, spending an estimated RM364mil and RM102mil respectively in those buys.

The provident fund has also emerged as a substantial shareholder in two Singapore-listed Malaysian rubber glove companies, namely UG Healthcare Corp Ltd and Riverstone Holdings Ltd.

UG Healthcare has two manufacturing plants in Seremban while Riverstone, which is headquartered in Selangor, has manufacturing plants in Taiping, Thailand and China.

Buying at peak valuations

EPF’s choice of going into rubber glove stocks also comes at a time when other blue chips on Bursa Malaysia are trading at low values.

Many bank stocks, for example, are trading at below their book values, such as CIMB Group Holdings Bhd, RHB Bank Bhd and AMMB Holdings Bhd.

So what gives? Is the EPF risking buying into these companies at their peak valuations?

Or is it making savvy bets on a sector that seems to continuously have solid orders for their products streaming in?

Isn’t a Covid-19 vaccine in the works, which could spell a gradual end to peak orders for gloves globally?

While the EPF has yet to respond to queries by StarBizWeek, there are some valid reasons why the provident fund is picking up shares in some of the glove stocks.

For starters, there is a lot of earnings visibility for rubber glove companies, at least in the next few quarters.

Equity analysts for the sector are expecting the revenue and earnings of glove makers to continue growing over the next few quarters as demand outstrips the supply and the average selling prices (ASPs) are still on the rise.

They are bullish on rubber glove stocks. And for the very reason that there is earnings visibility, the ASPs will not be tapering off any time soon.

Top Glove, which has the most analyst coverage, has 17 “buy”, four “hold” calls and one “sell” call under its name.

Credit Suisse Research gives it a target price of RM16.20. Based on its closing price of RM8.81 yesterday, this represents a 84% upside.

The highest target price for Hartalega, with 14 “buy” calls, is RM28.80, given by Affin Hwang Capital Research. This is a 66.5% upside from its last traded price of RM17.40 yesterday.

Areca Capital chief executive officer Danny Wong (pic below)

concludes that some rubber glove counters may have priced in the growth but there are selected ones that can do better and are not fully reflected in their prices yet.
 

He says gloves are becoming a necessity to many users and industries so it makes sense for long-term portfolios to have exposure in the rubber glove sector.

“I do not agree that the current valuations are fully reflected. It depends on the growth and upcoming earnings.

“Judging from the demand, pricing power and ability to deliver orders and earnings, the sector would have more potential, especially the bigger and established players.

“Of course they are not as cheap as before, but the potential is there, ” he tells StarBizWeek.

Steadiness of the ASPs

Equitiestracker Holdings Bhd head of research Lim Tze Cheng says the key thing to decide whether rubber glove counters are worth buying is whether its ASPs can hold for the foreseeable future.

“Unless you really have the visibility and you really think the ASPs are going to hold for the next two to three years or in the long term, I will agree that glove stocks look like a cheap opportunity now.

“But if you are uncertain about the ASPs going forward, then you’re facing some risks, ” he says.

While he is certain the ASPs will not return to what it was pre-Covid-19, Lim is not optimistic that the selling prices would remain at current levels.

“Two things affect the business - volume and price. I don’t disagree that the demand for gloves is still strong even after Covid-19 subsides. I also don’t disagree that there is still some pressure on the supply as there is some mismatch, ” he says.

Assuming that the pre-pandemic price per carton of gloves was RM90 and the current price is RM400, Lim asks if the price would remain steady in a situation where supply shortage, now at 80% falls by 20% each year.

“Yes, there will still be a shortage of 40%, but will you still be able to hold the ASP at RM400?” he asks.

The appeal of bumper dividends

More than capital appreciation, the free cash flows that many rubber glove companies are enjoying must make them attractive to the EPF, due to the likelihood of increased dividends. The EPF is one of the world’s largest provident funds, with investment assets of RM929.64bil under its management as at end-June, of which 38.2% are in equities.

Yielding stocks are clearly one of its favourites.

In this regard, attention should be drawn to Top Glove, which has spent RM355mil last month buying back its own shares.

However, that strategy is changing as the glove maker says it will start paying out dividends on every quarter and that a special dividend payout is possible should it take on this quarterly payment scheme.

UOB Kay Hian Research says in a note that a special dividend, if declared by the management, is possible in the third quarter of Top Glove’s financial year ending Aug 31,2021.

Based on the group’s dividend policy payout of 50% on projected earnings, the research house says the implied dividend yield for FY21 is 7.7%.

For every 10% additional payout, this increases the dividend yield by 1.6%.

It points out that dividend yields would moderate to 2.1% and 1.2% in FY22 and FY23 respectively.

Glove stocks are liquid goods for big funds like EPF, which allows them to get out if things go south.

The vaccine effect on gloves

Fortress Capital Asset Management chief executive officer Thomas Yong is of the opinion that the share prices of the rubber glove stocks are getting more sensitive to the development of the Covid-19 situations as well as the potential vaccine developments.

Given that the outlook of the share prices might become more volatile, he reminds investors to be cautious.

“With quite a number of vaccine candidates in the third phase of clinical trials, there is a likelihood that a vaccine would be developed by the year end or early next year.

“However, the approval process might vary for different countries and it might take some time for the vaccine to roll out or reach the majority of the population, ” says Yong, adding that the development of vaccines and the speed of reaching out to people would affect the sentiment on glove stocks.

He thinks some investors might lose interest in the glove stocks.

Singapore Exchange (SGX) market strategist Geoff Howie says the biggest driver of markets in the fourth quarter will continue to be the social and economic impacts of containing Covid-19 in addition to vaccine developments.

“While vaccine deployment has the potential to save lives and provide a much needed economic boost, the world has clearly changed.

“Current indications are products and services that facilitate health and safety will remain in demand as the world continues to gradually recover socially and economically, ” he says, adding that rubber glove market leaders have forecast continued double digit-demand for rubber gloves in the years ahead.

Howie says increased automation and productivity, in addition to the growing field of application including food processing and precision engineering, have also been touted as future industry drivers.

Commenting on whether the successful development of a vaccine will topple the share prices of rubber glove makers, Wong says the actual question should be if the vaccine will replace the need for gloves.

“After the vaccine is introduced, will the glove demand suddenly disappear? Also, who can give an assurance that there would not be new pandemic or illness ?

“The fact is: there are pent-up orders and these support the ASP. More importantly is, the earnings are genuine and it can be delivered, ” Wong says.

Being among the world’s top pension funds, EPF’s investment horizon is generally long term.

It has exposure in six rubber glove counters, four in Malaysia, two in Singapore. The other two that were not mentioned above are Hartalega and Comfort Gloves Bhd, in which the EPF holds 2.07% and 2.1% respectively.

During the first series of Invest Malaysia 2020 in July, EPF chief executive officer Tunku Alizakri Alias regarded Covid-19 as a “great revealer” that would unearth companies and businesses that will not last in the long run.

Perhaps, there may still be value in glove makers, which gives EPF the confidence to continue pumping money into the sector.

There is also talk in the market of an upcoming initial public offering for a rubber glove producer in Perak, other than Klang-based Smart Glove Corp Sdn Bhd and Perak-based Harps Holdings Sdn Bhd.

Maybe it is not the end just yet, for the rubber glove story.

No one will be able to determine for sure now, but time will tell.

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