TOP GLOVE CORPORATION BHD (SGX:BVA)
RIVERSTONE HOLDINGS LIMITED (SGX:AP4)
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:
- World Health Organization (WHO) announced containment of the pandemic and,
- 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)
- The operating environment has been very favourable for glove manufacturers. Strong demand and tight supply have led to further increases in ASP, while lower raw material prices have further boosted margins. We raised our earnings forecast for FY20F/FY21F by 30%/41% on higher ASP and margins.
- On the back of higher earnings, our target price for Riverstone (SGX:AP4) is revised upward to S$3.09 (previously S$2.20), or PE of 28x (up from 26x, in line with the re-rating of its peers) on FY20F earnings, which is at a 30% discount to its peers.
- See Riverstone Share Price; Riverstone Target Price; Riverstone Analyst Reports; Riverstone Dividend History; Riverstone Announcements; Riverstone Latest News.
- See company report: Riverstone Holdings - DBS Research 2020-06-03: Positive Operating Environment Leading To Higher ASP & Margins.
Top Glove (SGX:BVA) (BUY, Target Price: RM18.45)
- We raise our Target Price to RM18.45, based on PE of 39x CY21F earnings. This is based on +2 SD of its 5-year mean. Top Glove is trading at 33x forward PE (near +1.3 SD of its 5-year mean PE). Top Glove’s order backlog is about 1 year and ASP has grown at double digit m-o-m since April. Its current utilisation rate is above 90%. We are expecting Top Glove to register a strong net profit growth of 163% y-o-y for FY20F, compared to its peers at about 70%-120% y-o-y. Upgrade to BUY from HOLD in view of strong earnings outlook.
- See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
- See company report: Top Glove Corporation - DBS Research 2020-06-04: Powered By Stunning Profit Growth.
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
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Siti Ruzanna Mohd Faruk
DBS Research
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https://www.dbsvickers.com/
2020-06-05
SGX Stock
Analyst Report
6.010
UP
2.00
3.090
UP
2.20
