Brokers' take: AmBank maintains 'hold' on glovemakers; CGS-CIMB retains 'add'

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 their earnings outlook.

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

As at 1.47pm on Wednesday, Top Glove was trading at RM6.63 on Bursa Malaysia, down RM0.05 or 0.8 per cent. The counter, which is dual-listed in Singapore and Malaysia, was trading at S$2.17, down S$0.01 or 0.5 per cent on the Singapore bourse.

Meanwhile, Hartalega slipped RM0.12 or 0.9 per cent to RM13.02, whereas Kossan dropped five sens or 1.1 per cent to RM4.51.

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, and are already priced in. While we believe that glovemakers' 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 also 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.

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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, as a result of successful roll-outs of Covid-19 vaccines.

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

It has a target price of S$1.70 for UG Healthcare, and a target price of S$2.50 for Riverstone. As at 1.47pm on Wednesday, UG Healthcare was trading at 71.5 Singapore cents, up four cents or 5.9 per cent, while Riverstone had advanced S$0.06 or 4.3 per cent to S$1.47.

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

"Based on our channel checks, glove ASPs remain firmly on an uptrend, which could support strong earnings in 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. The disposable gloves manufacturer had posted a net profit of S$846,000 for H1 FY20, and a net profit of S$305,000 for Q1 FY20.

According to the brokerage's estimates, UG Healthcare's ASP rose by 10-20 per cent month on month (m-o-m) in December, and is set to further increase by 5-10 per cent m-o-m in January and February this year.

Meanwhile, CGS-CIMB expects Riverstone to report a net profit of RM275 million for Q4 FY20 - which is 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 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 cheaper valuation and our expectations of higher normalised profits," the brokerage added.