Malaysian Rubber Gloves: Is Plan B needed for investors?

An employee monitors latex gloves on hand-shaped molds moving along an automated production line at a Top Glove Corp. factory in Selangor, Malaysia on Feb. 18, 2020.

Image source: Time.com

The Edgemarkets.com on Friday 26 Jun 2020 reported that rubber glove makers share prices are taking a breather after a research house had cut its call on the sector to “neutral” from “overweight” on the assumption that the supernormal profits being recognised by glove makers would not be sustainable in the long run.

The financial website reported that a PublicInvest Research analyst in a note out had pointed out that the Covid-19 pandemic outbreak led to the spike in demand for rubber gloves in recent months, which translated to higher average selling prices (ASPs).


According to the report, the analyst see glove players to continue delivering record high profits in the coming quarters, and raised the FY20, FY21 and FY22 earnings forecast for Kossan and Hartalega by between 11% and 124% to reflect the impact of higher ASPs and operational efficiency.

“However, we caution that such strong profits are unsustainable in the long run and we expect earnings to peak in 2021, therefore we reckon it is not justifiable to continue valuing the glove players at +2SD of its respective five-year historical mean,” said the analyst.

On the other hand, Malaysian Rubber Glove Manufacturers Association (MARGMA) president Denis Low told theedgemarkets.com that fundamentals of the rubber glove industry are very much intact, with most manufacturers fully booked and oversold up to next year.

“There is now the second wave and further demand to contend with. It is already a big challenge to fulfil the current requirements,” he said.

The rubber glove counters have seen a meteoric rise since the outbreak of Covid-19.

Among the big four glove makers, Supermax was the biggest gainer by percentage, up 392.81% year-to-date, followed by Top Glove, which gained 219.06%, Hartalega (118.88%) and Kossan (93.15%).

PEG Corporate Finance and Research view:

Trading-wise, it has been reported that the valuations of glove players on Bursa Malaysia are now quite stretched and may have priced in the potential strong rise in their earnings over the next year.

The strong rise in the share prices could also mean higher risk for traders or investors attempting to take a position in these stocks at this juncture (see table below).

A look at analyst valuations show that most glove counters are now trading near their average consensus target price although some analysts are still looking for much higher target prices (see table below).

So how should a trader position himself in the sector?

A way to trade these stocks is to ensure that you limit your entry to the correct position sizing while timing your entry to low cycle entry only. You should also re-enter your positions only when the stock prices are at the minimum above the algorithm-calculated price as shown in the table below.

Investors and traders should also pay attention to the trend and trend support indicators as highlighted in the table above to determine whether the uptrend in rubber glove counters may have ended or just taking a breather.

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Please note that all algorithms calculated are dynamic and will change as prices, volume, and other proprietary factors etc. move in real-time.  All information pertaining to any technical or algorithm content are the proprietary assets of our affiliate partner, Bulls and Bears Research.

For more information on the algorithm, please contact our Corporate Finance and Research unit at:

Steven Liew
Head of Strategy
stevenliew@pegroupholding.com

Albert Ting
Head of Corporate Finance
albertting@pegroupholding.com

 

 

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