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KUALA LUMPUR: CGS-CIMB Equities Research reiterates its request to be overweight in the glove sector as concerns about possible declines in average selling prices (ASP) from CY21F are premature at this time.
The research house said there are indications that ASPs may remain elevated for a longer period (until the end of CY21F).
“Despite its bright outlook, the Malaysian glove sector is attractively trading at 16.7 times the CY21F P / E, a 24.3% discount from its five-year average P / E of 22 , 1 times.
“In our opinion, this has largely been reflected in concerns of a potential windfall tax and the discovery of a Covid-19 vaccine,” he said.
Commenting on the visibility of the order from glove manufacturers, the research house expected it to be robust until at least the end of 1HCY21F, a testament to the current strong global demand for gloves.
“In our opinion, the acute global glove shortage is likely to get worse as Covid-19 cases around the world show no signs of slowing down.
“Keep in mind that many developed markets (with high per capita glove use), such as the US and the UK, have continued to record new highs in daily Covid-19 cases,” he said.
CGS-CIMB Research expects the situation to worsen as more Western countries approach the wintering period in 4Q20, which could lead to new spikes in Covid-19 cases.
In terms of ASP, glove manufacturers expect further increases to at least 1QCY21F. This is based on the recent increase in raw material prices, as well as the acute global shortage of gloves.
“According to our estimates, glove ASPs could increase 10-45% QoQ in 4TCY20F to $ 50- $ 100 per 1,000 pieces, which is above our current projections.
“However, we understand that certain glove buyers are willing to offer fixed ASPs (at a substantial premium to current ASPs) with a minimum one-year contract to secure glove supply.
“In our opinion, this should provide ASP certainties for CY21F if glove manufacturers accept these contracts,” he said.
On the possible windfall tax, glove manufacturers and the Rubber Glove Manufacturers Association of Malaysia (MARGMA) indicate that there has been no engagement with the government on this matter.
CGS-CIMB Research said that in their view, implementing a windfall tax in the glove sector would have negative long-term implications as this will drive glove manufacturers to countries with more conducive environments (eg example, work, tax incentives, utilities, etc.).
Glove stocks have been sold off with the recent news flow about the development of the Covid-19 vaccine.
However, he believes that eradication of the virus may take a while longer, given that: i) no Covid-19 candidate vaccine has passed Stage 3 and 4 of clinical trials, ii) current limited production capacity may hamper availability. massive, and iii) possible virus mutations.
Furthermore, he believes that the demand for gloves is unlikely to decline even with a vaccine, as glove use will increase as the masses rush to get vaccinated.
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