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KUALA LUMPUR (Jan 13): JP Morgan, which initiated coverage of Malaysia’s rubber gloves industry with “sell” calls in December, reminded investors that gloves are “not necessary” to administer vaccines. .
“With ongoing vaccines, we expect glove demand to continue to decline,” JP Morgan wrote in a research note dated January 11.
This is in contrast to the consensus expectation that the demand for disposable rubber gloves will not drastically decline, as leaders still need them during vaccinations.
Citing the US Centers for Disease Control and Prevention, the UK National Health Service, and Canada’s British Columbia Center for Disease Control, the US bank said medical officers are not required to wear gloves while vaccinating.
Gloves are only needed if healthcare workers are likely to come into contact with bodily fluids or if there is an open wound. The guidelines also state that even after wearing gloves, consistent hygiene between each patient would be the best way to minimize the risk of disease transmission, ”he wrote.
Furthermore, JP Morgan emphasized that glove prices may have peaked as testing efforts have started to stabilize in most countries, especially developed ones. The bank noted that the current unprecedented demand is mainly due to high testing activities globally, particularly in developed countries.
“Aggregate market capitalization of Malaysian glove producers is 86% correlated with new US daily test data. High 90% correlation was due to higher hospitalization rate, driven by more testing , which in turn leads to higher demand for medical supplies and gloves, ”the bank commented.
The slower anticipated demand, JP Morgan said, implies a limited increase in average selling prices for rubber gloves.
In an earlier research note dated Jan.6, JP Morgan said it expects glove prices to peak in the first half of 2021, with prices and profits normalizing thereafter.
The bank had compiled data from 18 countries, representing 17% of the world’s population, and found that, in addition to India, Canada, Russia and the United Kingdom, the remaining countries it tracked are experiencing a slowdown in testing.
This limits the price advantages of gloves, JP Morgan said, as “the more you test, the more cases will be discovered, leading to hospitalization and a need for medical supplies and gloves … Sudden increases in tests created shortages that shifted the price of the gloves from traded base to spot. “
At the time, the average sale price was $ 140 compared to $ 22 before Covid-19, which the bank said was due to unsystematic purchases.
Insured revenue growth is not assured
Investors argue that revenue growth is assured, as most glove producers claim to have two or more years of backorders, but JP Morgan disagrees.
“Understanding order backlog and assured revenue is crucial. Orders are simply an agreement to buy a certain volume with certain or undecided prices. Buyers can walk away from it,” he wrote, noting that assured revenue is when customers have paid in whole or in part for future delivery.
“As shown by Top Glove’s quarterly results, we have indeed seen a sharp increase in deposits raised, from RM60 million a year ago to RM1 billion last quarter.
“However, the deposit paid is only 4.7% of projected revenue for the financial year ending August 31, 2021 (FY21). It is not even equal to a month’s worth of glove sales,” JP said. Morgan.
JP Morgan held “underweight” options in Top Glove Corp Bhd with a price target (TP) of RM3.50, Hartalega Holdings Bhd (TP: RM8.50) and Kossan Rubber Industries Bhd (TP: RM3.80).
However, it warns that risks to calls to the three glove producers include a second global wave of Covid-19 that could drive glove prices to new heights, unscheduled capacity outages, a significant drop in costs of inputs such as nitrile and natural rubber, a significant increase in dividend payments, as well as a substantial degree of ringgit depreciation.
At noon, Top Glove fell five sen to RM6.63, giving a market capitalization of RM54.54 billion. Hartalega fell 12 sen to RM13.02, with a market capitalization of RM44.76 billion. Kossan fell five sen to RM4.51, with a market capitalization of RM11.51 billion.
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