KUALA LUMPUR (May 18): Affin Hwang Capital Research remains upbeat on the rubber glove sector despite strong stock-price performance, which had risen 32% over the past two weeks.

In a sector update today, Affin Hwang said the demand for rubber gloves has continued to surprise on the upside, as some manufacturers have started accepting orders for delivery one year in advance with 20% deposits.

“The strong demand has also given manufacturers the flexibility to continue raising selling prices, which we are now forecasting at 5-8% per month starting from June, higher than the 1-2% per month we forecasted earlier. Although selling prices will only be confirmed 1-2 months prior to delivery, buyers are still likely to take delivery or risk losing their deposits,” it said.

With the current strong demand, the research house believes that the sector should achieve record earnings in 2020.

“Given that we are only expecting a 10%-12% increase in (effective) capacity in 2020, we believe that there will still be shortages of gloves in 2021, although the problem is not as severe as currently experienced. As such, we are forecasting [average selling prices] to increase by around 3%-5% for the whole 2021.”

Although the sector price-earnings ratio (PER) is currently trading above two notches standard deviation (+2SD) of its historical average, the research outfit does not think valuations are overstretched yet as there could still be upside risk to the earnings forecasts given the assumption that demand will normalize by the second half of 2021 (2H21).

In addition, the research house is not expecting any negative surprises in the earnings of glove companies, for at least the next few quarters, as it does not foresee any execution risk, and the strong earnings growth would likely help to re-rate the sector further.  

As such Affin Hwang is maintaining an “overweight” call on the rubber glove sector, due to high certainty on the sector earnings.

Top Glove Corp Bhd and Kossan Rubber Industries Bhd remain as top “buy” picks for the sector and country, with higher target prices of RM12.60 (from RM8.70) and RM8.50 (from RM7) respectively.

Meanwhile, Hartalega Holdings Bhd’s rating was raised from “hold” to “buy” with a higher target price of RM10.20 (from RM7.70).