Glove Manufacturers - DBS Research 2020-06-05: Extraordinary Demand Uplift; Near-term Earnings Strength Provide Share Price Support


Glove Manufacturers - Extraordinary Demand Uplift; Near-term Earnings Strength Provide Share Price Support

  • Escalating global COVID-19 cases support demand surge; industry shortage has led to uptrend in pricing.
  • On course for extraordinary profit growth rates as players ramp up utilization rates and lock-in higher margins.
  • Catalysts: earnings surprises, ASPs increases, increased usage leading to “new normal” demand.
  • BUYs: Top Glove (SGX:BVA), Hartalega, Kossan, Riverstone (SGX:AP4).

Ramping up the utilisation; order backlog extended.

  • Rubber glove manufacturers are seeing robust demand leading to industry shortages and uptrend in pricing, as global Covid-19 infection rates have stayed high. We gather the rubber gloves producers are running at utilisation rate of above 90% with the order backlog at 1 year compared to usual 1-2 months.
  • We raise our sales volume and ASP assumptions for rubber glove companies and forecast stronger earnings growth of 85% for the sector in 2020 (compared to average of 16% over the last three years), as manufacturers ramp up their utilisation in view of the surging demand. Rubber glove producers under our coverage are on course for record profits.

Expect strong earnings delivery.

  • We upgrade Top Glove (SGX:BVA) and Hartalega to BUY in view of the stronger earnings outlook. Near-term share price catalysts include earnings surprises driven by escalating prices and margins. Every 1% improvement in net margin will increase these companies’ net profit by 5-9% and TPs by 5-9%.
  • We also like Singapore-listed Riverstone (SGX:AP4) and Kossan Rubber Industries (KRI) for their relatively attractive valuations. Riverstone’s CY21 price-to-earnings (PE) of 20.0x is at a 41% discount to its peers’ average. The stock is supported by a strong balance sheet with net cash position.

Margin uplift to be earnings kicker and share price catalyst.

  • We expect higher ASPs to be reflected in sequentially stronger 2QCY20 profit. In addition, 2H20 should see a meaningful step up in sales volume and margins compared to 1H20. A second wave of infections from the gradual easing of lockdowns could see glove demand sustained at high levels.
  • Over the longer term, even as infection rates ease, we expect the Covid-19 experience to drive increased usage of gloves globally, sustaining a “new normal” of demand.

COVID-19 infection rates still high

  • During the H1N1 outbreak, rubber glove manufacturers’ share prices corrected when:
    1. World Health Organization (WHO) announced containment of the pandemic and,
    2. rubber glove manufacturers reported weaker net profit q-o-q.
  • Global Covid-19 daily infection rates have stayed relatively high. Countries such as United States and Brazil account for 19% and 24% of new cases, as of 3 June. Countries with high populations such as India have also contributed significantly to the increase of daily new cases.
  • Compared to H1N1, the current COVID-19 pandemic seems more contagious. H1N1 had 491,382 confirmed cases. COVID- 19 currently has 6.4m confirmed cases, about 13 times H1N1 levels.

Risks of second wave.

  • Many countries are slowly reopening their economies after being hit by COVID-19. However, there are increasing concerns that asymptomatic patients may trigger a second wave of infections. According to research conducted by Dr. Gigi Gronvall, an immunologist and senior scholar at the Johns Hopkins Center for Health Security and an associate professor at the Johns Hopkins Bloomberg School of Public Health, out of 5% of Iceland’s population that were tested for COVID-19, about 50% who tested positive had showed no symptoms. This could make it harder to contain COVID-19.

New vaccine on the way but could take time.

  • Development of a vaccine for COVID-19 could take an estimated 12 to 18 months at the earliest, according to Dr. Anthony Fauci, director of the US National Institute of Allergy and Infectious Disease. Usually, a new vaccine takes a few years to develop and will go through three phases of trials.

Long term earnings supported by awareness of glove usage.

  • Glove consumption per capita has shown positive growth annually, except in the post pandemic years of 2004 and 2010.

Extended order backlog; higher ASPs

  • Order backlog is now at about 1 year for some companies compared to the usual 1-2 months. In April, order backlog was at about 4 months. Rubber glove production plants are running at utilisation rate of above 90%. In view of the shortage of rubber gloves in the market, ASP has increased compared to early this year.
  • We raise FY20 and FY21 ASP assumption for all rubber glove companies under our coverage. Our net profit forecasts are above consensus largely on higher sales volume and margin assumptions.

BUYs: Top Glove, Hartalega, Kossan, Riverstone

Riverstone (SGX:AP4) (BUY, Target Price: S$3.09)

Top Glove (SGX:BVA) (BUY, Target Price: RM18.45)

Kossan (KRI MK: BUY, Target Price: RM11.00)

  • We raise KRI’s Target Price to RM11.00, based on 35x FY21F EPS. This is a 20% discount to Hartalega and Top Glove’s average target PE of 43.5x. KRI is currently trading at 28x forward PE, or +1.5 SD of its 5-year mean PE.

Hartalega (HART MK: BUY, Target Price: RM13.75)

  • Post earnings, adjustment, we raise our Target Price for to RM13.75 (from RM5.95), pegged to 48x CY21F EPS. This is equivalent to +2 SD (standard deviation) of its 5-year average. HART is trading at 41x CY21F PE, close to +1.2 SD of its 5-year mean PE. Upgrade to BUY from HOLD on strong earnings expectations.

See PDF report attached below for complete analysis.

Malaysian Research Team DBS Group Research | Siti Ruzanna Mohd Faruk DBS Research | https://www.dbsvickers.com/ 2020-06-05
SGX Stock Analyst Report BUY UPGRADE HOLD 6.010 UP 2.00