Rubber Gloves – Malaysia - CGS-CIMB Research 2020-03-11: Covid-19 Concerns To Drive Glove Demand

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Rubber Gloves – Malaysia - Covid-19 Concerns To Drive Glove Demand

• WHO said that as of 9 Mar 2020 there were a total of 105,586 confirmed cases of the coronavirus (Covid-19) globally, resulting in 3,584 deaths.
• Glovemakers should benefit from the higher demand for gloves as Covid-19 spreads to more countries and the operating environment stays favourable.
• Maintain Overweight, with Top Glove (SGX:BVA) and Kossan as our top picks.

Covid-19 spreads to more than 102 countries

• The World Health Organisation (WHO) said that as of 9 Mar 2020 there were 105,586 confirmed cases (laboratory confirmed) of the Covid-19 globally, resulting in 3,584 deaths. While China continued to account for the bulk of the cases and death toll (76.6% of global cases; 86.5% of global deaths), the number of countries affected has continued to grow to more than 102, including most of the industrialised world.

WHO has signaled MARGMA members to ramp up glove production

• Our channel checks reveal that glovemakers under our coverage are seeing strong demand, with a robust order backlog of more than three months. Furthermore, WHO
• has been
  1. urging countries to plan for Covid-19 by preparing emergency response systems, including increasing capacity to detect and care for patients, and
  2. advocating that countries stock up on required supplies for their healthcare facilities. (see statement)
• The Malaysian Rubber Glove Manufacturer Association (MARGMA) also recently said WHO has contacted them to ensure there would be no worldwide shortage of gloves. See Malaymail report.

Expecting glovemakers to record sequentially-stronger earnings

• In our view, glovemakers are likely to record stronger earnings, especially from 2QCY20 onwards. This will mainly be driven by:
  1. higher demand for gloves leading to greater economies of scale and better pricing power,
  2. a more conducive operating environment (weaker RM/US$ [YTD:-3.7%] and lower raw material prices, and
  3. capacity expansion plans gradually coming on-stream throughout the year (FY20F: +14.1% y-o-y).

Potential upside to our EPS forecasts

• Based on our current forecasts, glove stocks under our coverage will record a 14% rise in CY20F revenue (still based on 8-9% global glove demand growth). In our view, this could be surpassed given recent indications by MARGMA of a strong surge in global glove demand.
• Based on our estimates, every 5% pt rise in the utilisation rate of each glovemaker (current assumption: 82-85%) could lead to 6.8-10.1% upsides to our FY20- 22F EPS forecasts. Note that we have yet to factor in any upside to our EPS estimates from the likely higher demand for gloves arising from the Covid-19 outbreak.

Maintain Overweight; glove makers should continue to trade higher

• Overall, we advise investors to stay overweight on the glove sector despite its premium valuation (near +2 s.d. from its 5-year mean), which is premised on strong global glove demand and a favourable operating environment, allowing glovemakers to outshine in terms of positive earnings growth in a volatile KLCI market.
• Currently, we have ADD recommendations for all four glove stocks, with Top Glove (SGX:BVA) and Kossan as our top picks.
• Downside risks: sharp easing of coronavirus concerns and/or stronger ringgit vs. US$.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-11

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