SINGAPORE – The recent drop in prices for Malaysian rubber glove makers is "unjustified," said an analyst who predicts further uptrend for stocks.
Top Glove, the world's largest manufacturer of rubber gloves, was down 17.7% this year at the close of trading on Monday. The smaller colleagues Hartalega, Supermax and Kossan fell between 18% and 30%.
In comparison, the benchmark index FTSE Bursa Malaysia KLCI fell 0.9% over the same period.
Employees at Top Glove, the world's largest glove manufacturer, will test latex glove production in a waterproof test room in one of the company's factories in Selangor, Malaysia on February 18, 2020.
Samsul said | Bloomberg | Getty Images
"We are maintaining our overweight stance in the sector as we believe the recent decline in share prices is not justified," wrote Ng Chi Hoong, an analyst at Malaysian investment bank Affin Hwang, in a report on Monday.
The decline in Malaysian glove inventories followed a significant jump last year as the Covid-19 pandemic boosted demand for medical gloves.
Factors affecting investor confidence in the stocks include a potential drop in glove retail prices with lower demand as more people are vaccinated around the world, Ng said.
In addition, Top Glove's plans to list in Hong Kong – the third public listing after Malaysia and Singapore – also sparked concerns that the company is raising funds in anticipation of a weaker outlook, he said.
But those concerns are likely to subside, Ng said. Here are its target prices for Malaysia's glove inventory.
Affin Hwang's target price for Malaysian glove stocks
Stocks Monday is over (Malaysian ringgit) Guide price (Malaysian ringgit) head Top Glove5.0410.10100% Hartalega9.7017.0075% Supermax4.2110.90159% Kossan3.669.30154%
Challenge to stay above pre-covid levels
The analyst said the increase in average glove retail prices was unsustainable and forecast a 30% to 35% price drop in 2022. Still, prices are likely to stay above pre-pandemic levels for at least the next two to three years. he said.
This is in part because the demand for gloves is expected to continue to grow in the coming years as the medical sector makes more use of personal protective equipment, Ng said.
He added that he agreed with the report by consultants Frost and Sullivan, commissioned by Top Glove, which said demand for disposable gloves would grow an average of 15% annually for the next five years.
Such growth in demand would be accompanied by a 20% annual supply increase over the next few years, Ng said.
Top Glove is planning a listing in Hong Kong
Another development that has fueled recent price moves in Malaysian glove stocks is Top Glove's planned third listing in Hong Kong.
The company announced last month that it had applied for a "double primary listing" in Hong Kong that could raise up to 7.7 billion ringgit ($ 1.87 billion). It said it will keep its current primary listing in Malaysia and secondary listing in Singapore.
Investors reacted negatively to news that the additional listing would dilute Top Glove's earnings per share.
Nonetheless, Ng has kept his buy recommendation for Top Glove and his Malaysian colleagues. He said the fall in stock prices had lowered valuations to levels "too cheap to ignore".
The analyst added that Malaysian glove makers have a higher dividend yield and better return on equity compared to their international counterparts – a measure of financial performance.
Top Glove on Tuesday reported an increase in quarterly earnings to 2.87 billion ringgits ($ 695 million) for the three months ended February from 115.68 million ringgits ($ 28.03 million) a year ago.
The company said global demand for gloves continues to be "strong" as the Covid pandemic has led to an increase in glove use and hygiene awareness.