UOB Kay Hian Malaysia Research has upgraded Top Glove to a Buy with an unchanged target price of RM6.42 as it will benefit from falling latex prices and is set to capture additional demand from a possible avian influenza pandemic.
The research house said on Monday recent events, such as the new wave of an avian influenza outbreak, a sharp decline in latex prices and a strengthening US dollar, have brightened the prospects for natural rubber glove players.
“We upgrade Top Glove to BUY with an unchanged target price of RM6.42 as valuations are now looking attractive following the 6.3% year-to-date decline in share price,” it said.
UOB Kay Hian Malaysia Research said valuations are also looking attractive at 12.7 times 2015 forecast price-to-earnings (versus 17.4 times and 14.2 times for Hartalega and Kossan respectively) following the 6.3% year-to-date decline in its share price.
“As such, we upgrade our call for Top Glove to a Buy (from Hold) with an unchanged target price of RM6.42,” it said.
UOB Kay Hian Malaysia Research said news reports highlighted that Chinese scientists had discovered a new strain of bird flu virus, H10N8 that had killed a woman in Dec 13 and infected another individual last month.
According to “The Lancet” medical journal, this new variant of the influenza strain had mutated features that allows it to spread efficiently among humans and thus had potential pandemic qualities.
Similar to the H7N9 virus, the H10N8 strain is one of a subgroup of influenza viruses that normally circulate among birds and had only recently been detected in humans.
The research house there had been no letup in H7N9 avian influenza infection this season with 115 new H7N9 cases (including 25 deaths) reported so far this year, lifting the total tally to almost 300 cases and 63 fatalities in China, since the strain was first discovered in March 2013.
Although, the World Health Organisation (WHO) reckons that the recent spike in cases was due to seasonal factors rather than a mutation and there has been no evidence of sustained human-to-human transmission so far, certain quarters remained concerned that the steady waves of infections could increase the chances of the virus mutating the ability to transmit more efficiently from human to human.
“Weak latex prices augur well for natural rubber glove players. Although latex prices had been hovering well within the range of RM5.09-5.53/kg throughout 4Q13, it staged a sharp decline below the RM5 a kg mark (to about RM4.51 at a kg currently) amid the growing surplus of rubber stock within the region.
“We also believe that the recent political upheaval in Thailand had hampered the government’s effort to stock up on rubber stocks to support prices,” it pointed out.
UOB Kay Hian Research pointed out should the current situation persist, natural rubber players could enjoy some margin expansion over the next quarter as they benefit from the time lag in passing on the lower latex cost to customers.
“We note that lower latex prices could also translate into more competitive selling prices for latex gloves and this could convert some nitrile gloves purchases back to latex gloves.
“Meanwhile, the firmer exchange rate of about RM3.32/US$ currently (as compared to the three-year average of RM3.09/US$) suggests room for further earnings enhancement.
“Overall, these should lift investors’ sentiment towards the natural rubber glove manufacturers,” it said.