Rubber glove makers are recording higher sales, especially Malaysian company Top Glove.
CIMB Research in a note upgraded its call on Top Glove Corp Bhd to buy with a substantially higher target price after the world’s biggest glove maker reported an “exceptionally high” sales volume in its last quarter ended Aug 31, 2017 (FY17).
“We expect stronger earnings in FY18,” CIMB Research said, citing robust demand growth outlook and lower pricing competition.
The firm valued Top Glove at RM6.90 a share after the company beat the market’s expectation with a 27% quarter-on-quarter jump in net profit to RM98.6mil.
This lifted its full year ended Aug 31, 2017 (FY17) net profit to RM333.2mil. CIMB expects Top Glove earnings to increase to almost RM390mil in FY18.
The bullish outlook had fired up investors’ expectation on other major glovemakers, including Hartalega Holdings Bhdand Kossan Rubber Industries Bhd.
Shares of both companies were on a tear ahead of their latest quartely results next month.
In the last one month, shares in Hartalega had surged 15% to an all-time high of RM7.48, while Kossan was up 4.3% at RM7.06. Top Glove share price had gained 11% over the same one-month period at RM6.01 on Friday.
Last week Malaysian Rubber Glove Manufacturers Association (Margma) president Denis Low Jau Foo had told StarBiz that the reduced supply of vinyl gloves from China was a boon for local manufacturers.
He said total export value of rubber gloves from Malaysia was expected to increase by about RM3bil this year to RM16.2bil. He also said the growth can be sustained and perhaps improved further mainly due to the closure of some vinyl factories in China.
China produced about 160 billion pieces of vinyl gloves per year.
The supply disruption resulting from China’s fight against polluting industries contributed to a surge in demand for rubber gloves produced by Malaysian companies.
Low said the usual growth in terms of quantity of exported gloves has always been 8% to 10%, but this figure has moved up to 15.8% in the first half of 2017.
The production clampdown in China is also spurring Malaysian producers such as Top Glove to further expand their production capacity.
“As the world’s largest glove manufacturer, Top Glove should be able to capitalise on robust demand for rubber gloves,” CIMB Research said.
The firm also played down concern that Top Glove’s aggressive production expansion strategy would lead to a fresh supply glut in the industry.
“In our view, higher demand for rubber gloves as a substitute for vinyl gloves (lower supply from China) should help offset the sector’s increased capacity,” it said.
Analysts said improving demand and rising average selling prices have set the stage for earnings in the rubber glove sector to recover after three consecutive quarters of sluggish growth.
They also said that the share price movement of rubber glove makers is no longer heavily influenced by currency exchange rate.
Kenanga Research in a recent report suggested that while there is strong positive correlation between glove stocks and the weaker ringgit, relationship is strongest over the three-five year period.
However, over the past one year, the firm observed that the link has weakened, suggesting that these glove stocks might not be purely viewed as currency proxies.
“Moreover, given the strong demand coupled with players judiciously planning their capacity expansion, we expected sustained earnings growth to underpin current valuations,” it said.