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AmBank, CGS-CIMB 'neutral' on glovemaking sector

AmBank says it has already priced in valuations in its earnings outlook; CGS-CIMB still upbeat on 2 firms

AmBank has a fair-value estimate of RM6.50 for Top Glove Corporation. The company's shares closed at RM6.63 on Bursa Malaysia, down RM0.05. Above: A production line in its Selangor factory.


AMINVESTMENT Bank (AmBank) has maintained its "neutral" stance on the glove sector, citing that valuations for glove companies under its coverage are already fully reflected in its earnings outlook.

The brokerage has a fair-value (FV) estimate of RM6.50 for Top Glove Corporation, an FV of RM12.25 for Hartalega Holdings, and an FV of RM4.80 for Kossan Rubber Industries, it noted in a sector update on Wednesday.

Top Glove shares closed at RM6.63 on Bursa Malaysia, down RM0.05 or 0.8 per cent. The counter, which is dual-listed in Singapore and Malaysia, finished at S$2.17 on the Singapore bourse, down S$0.01 or 0.5 per cent.

Meanwhile, Hartalega slipped RM0.14 or 1.1 per cent to RM13 by the closing bell on Wednesday; Kossan dropped eight sen or 1.8 per cent to RM4.48.

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Said AmBank analyst Thong Pak Leng: "We reckon the average selling prices (ASP) will begin to ease after H1 2021, following the strong increase over the past nine months... While we believe that glove-makers' fundamentals remain steady for the next few years, they offer limited upside at their current share prices. Hence, we advise investors to accumulate at lower levels."

AmBank forecasts Top Glove's net profit to be RM2.9 billion (S$948.8 million), RM2.7 billion and RM1.5 billion for FY21-23 respectively. It expects Hartalega to register net earnings of RM2.1 billion, RM1.3 billion and RM1.1 billion for FY21-FY23 respectively, and for Kossan to post net earnings of RM903.8 million, RM1.4 billion and RM511.3 million for FY20-FY22.

As a result of successful roll-outs of Covid-19 vaccines, it is also cutting its target price-to-earnings ratio by 10 per cent across the board to take into account the risk of a down cycle in the sector.

Separately, CGS-CIMB has maintained its "neutral" recommendation on the rubber gloves sector, with "add" calls for both Riverstone Holdings and UG Healthcare Corp.

It has a target price of S$1.70 for UG Healthcare, and a target price of S$2.50 for Riverstone.

Shares of UG Healthcare advanced 4.5 Singapore cents or 6.7 per cent to close at 72 Singapore cents on Wednesday, while shares of Riverstone added S$0.06 or 4.3 per cent to finish at S$1.47.

The brokerage believes that the fundamentals of the glove-makers remain strong in the year ahead, as a resurgence in Covid-19 worldwide would drive demand for gloves.

"Based on our channel checks, glove ASPs remain firmly on an uptrend, which could support strong earnings in the quarters ahead," CGS-CIMB analyst Ong Khang Chuen said in a report on Tuesday.

CGS-CIMB forecasts that UG Healthcare will report a net profit of S$30 million for Q2 FY21, after the disposable gloves manufacturer in November reported a net profit of S$22.7 million for its first fiscal quarter ended September. It had posted a net profit of S$846,000 for H1 FY20, and a net profit of S$305,000 for Q1 FY20.

The brokerage estimates that UG Healthcare's ASP rose by 10-20 per cent month on month in December, and is set to further rise by 5-10 per cent month on month in January and February this year.

Meanwhile, CGS-CIMB expects Riverstone to report a net profit of RM275 million for Q4 FY20 - almost nine times that of its net profit of RM32.1 million in the year-ago period.

"Riverstone sees strong demand in both its healthcare and cleanroom segments... We believe the margin expansion trend should continue in coming quarters, as ASP hikes continue to outpace raw material cost increases," Mr Ong noted.

Additionally, CGS-CIMB views the upcoming results announcements for UG Healthcare and Riverstone in February as a near-term share price catalyst. "UG Healthcare remains our preferred pick, given its relatively lower valuation and our expectations of higher normalised profits," the brokerage added.

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