Malaysia Gloves Sector - DBS Research 2020-01-15: Valuations Remain Uncompelling

TOP GLOVE CORPORATION BHD (SGX:BVA) | SGinvestors.io TOP GLOVE CORPORATION BHD (SGX:BVA)

Malaysia Gloves Sector - Valuations Remain Uncompelling

  • Sector valuations remain rich at +1 SD above the 10- year mean PE.
  • 2020 likely to see considerable new capacity expansion; we expect this to cap ASP gains.
  • Higher labour costs resulting from minimum wage increase offset lower gas cost.
  • Maintain Fully Valued on Hartalega due to valuations and Hold on Top Glove (SGX:BVA).



Recovery priced in.

  • The sector’s price-to-earnings (PE) valuations have eased in 2019 from the highs of +2SD (standard deviation) in 2018 following a series of earnings misses and consensus downgrades.
  • Despite moderated expectations, sector valuations remain uncompelling at +1SD of the 10-year mean PE.


ASP improvements likely to be capped.

  • We expect the major Malaysian glove players (Hartalega Holdings (HART), Top Glove, Supermax Corp (SUCB) and Kossan Rubber Industries (KRI)) to expand capacity considerably in 2020. Top Glove leads the expansion and is targeting to increase production by 11.8bn pieces of gloves, followed by Hartalega Holdings’s plan of increasing 7.3bn pieces gloves. Kossan Rubber Industries and Supermax Corp are planning to increase production by 3.0bn and 4.4bn pieces of gloves respectively in 2020.
  • In our view, this expansion, higher labour costs following the revision in the minimum wage and stronger Ringgit will likely cap ASP improvements in the medium term.


Valuations are expensive.

  • We reiterate our FULLY VALUED call on Hartalega Holdings. We believe valuations are excessive at 35x forward PE, a premium compared to its 5-year mean.
  • Among the three major producers, we like Top Glove the most as it has the highest net profit 3-year compound annual growth rate (CAGR) of 11.2% for FY19-FY22. The company has made commendable improvements in sales from developing markets and increasing total sales volume. A key re-rating catalyst for Top Glove would be a faster-than-expected recovery of its subsidiary Aspion Sdn Bhd which reported stronger 1QFY20 profits.
  • In view of the limited share price upside for Kossan Rubber Industries, we maintain our HOLD rating for the stock.
  • See attached PDF report for complete analysis.





Siti Ruzanna Mohd Faruk DBS Group Research | Malaysian Research Team DBS Research | https://www.dbsvickers.com/ 2020-01-15
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.390 SAME 1.390



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