Good returns seen for rubber glove sector

Earnings predicted to nearly double for FY20

PETALINGJAYA: The average selling price for the rubber glove sector has surged on the back of higher demand for protective personal equipment and a potential second wave of Covid-19 as delivery lead times lengthen.

UOB Kay Hian Research said the average selling prices have risen more than 10% from 3% to 5% previously, while the delivery lead times have extended to three to four months from the one to two months.

“Given the fluidity of the outbreak, we have resorted to a blue-sky scenario in our attempt to fully capture the earnings upside associated with the demand upswing against potential peak valuations.

“Our blue sky scenario includes average selling prices being raised 15% and -7% year-on-year (y-o-y) for 2020 and 2021, respectively, against a backdrop of industry volume growing by up to 18% y-o-y in 2020 before normalising to 5% in 2021,” it added.

Meanhile, UOB Kay Hian Research noted that operating margins of the rubber glove sector could be further supported by the lower raw material prices.

According to its estimates, every 1% drop in raw material cost could boost earnings by 1% to 4%.

“That said, we do not expect any cost savings pass through, seeing the imbalance in demand-supply dynamics,” it said.

Given the soft demand, latex prices have declined 9.5% from the first quarter. Nitrile prices are also 8% lower in May.

As such, UOB Kay Hian Research is maintaining a market weight on the rubber glove sector, as there is earnings upside of 99% and 46% for financial year 2020 (FY20) and FY21, respectively.

On the currency front, it expects an assumption of an average of RM4.30 to the US dollar for 2020 and 2021.

Should the ringgit weaken further from its estimate, the research house said every 1% depreciation of the ringgit against the US dollar could beef up glove makers’ earnings by up to 6%.

“This excludes the shared cost-saving mechanism with customers which will consequently moderate any significant gain in margins.

“However, we assume a 2% to 3% impact to earnings after factoring in the shared cost-saving mechanism,” it added.

For 2020, UOB Kay Hian Research said the big-three producers have their expansion plans intact, foreseeing Hartalega Holdings Bhd and Kossan Rubber Industries Bhd to add capacity close to 10% and Top Glove Corp Bhd expanding capacity by 14%.

“We expect utilisation to max out for the remainder of the year, given the surge in glove demand,” it noted.

“The average selling prices have risen more than 10% from 3% to 5% previously, while the delivery lead times have extended.” UOB Kay Hian Research