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Monday, July 15, 2019

CIMB Research upbeat on gloves, keeps Kossan, Supermax as top picks

Monday, 15 Jul 20198:50 AM MYT

KUALA LUMPUR: CIMB Equities Research is upbeat on the gloves sector and expects their margins to widen as it keeps Kossan image: and Supermax as its top picks.

In its research note issued on Monday, it thinks the supply-and-demand dynamics have turned more conducive for glove makers due to efforts to slow down commissioning of new capacity.

“This should ease the oversupply concerns that have bogged down the sector in 1H19, in our view. Consequently, we think glove makers will record stronger earnings from 2H19F onwards.

“In addition, we believe they would see their margins widen from ASP increases (to pass on cost increases in 1H19) and benefit from lower raw material prices moving forward,” it said.

CIMB Research conducted proprietary case studies on the dynamics of global glove supply and demand.

Its findings indicate that glove supply surplus in FY19/20F is unlikely as new capacity is being commissioned at a staggered pace, which implies that the effective rise in annual capacity is lower than headline numbers.

It also calculated the surplus/deficit ratio based on variations in assumptions for supply-demand dynamics.

“Long-term prospects for Malaysia’s glove sector remain upbeat, driven by inelastic glove demand (we project global demand growth of 8-10% p.a.). This is in tandem with rising global healthcare outlay and higher health awareness, mainly in emerging countries, where glove usage per capita is low.

“We expect Malaysia to remain a dominant force in the glove sector (64% of 2018 global glove exports) due to higher operating efficiencies, wider product offerings from better R&D efforts and aggressive capacity expansion plans,” it said.

CIMB Research said the glove sector now trades at 26.3 times forward price-to-earnings, less than one standard deviation above its five-year mean P/E of 29.4 times.

In its view, this is justified and the sector will continue to trade above its current P/E given: i) its defensive nature due to resilient glove demand, ii) its higher earnings growth vs. KLCI, and iii) its strong fundamentals (low gearing, high ROE).

Overall, it believes the worst is over for the glove sector and its risk-reward profile is improving.

This could drive stronger year-on-year and quarter-on-quarter earnings from 2HCY19F onwards.

“Thus, we maintain our Overweight call on the sector, with Kossan and Supermax as our top picks. We also have an Add call on Top Glove. Hartalega remains a Hold. Risks to our call are stiffer-than-expected pricing competition and sharp weakening of US$/ringgit,” it said.


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