AMBANK has maintained its "overweight" call on Malaysia's glove sector and raised its fair value (FV) of the world's largest rubber glove maker, Top Glove. 

This comes as it expects the sales volume and average selling price (ASP) of gloves to "grow exponentially" in the second half of this year amid the Covid-19 pandemic, wrote AmBank analyst Nafisah Azmi in a sector report on Tuesday. 

"We believe that selling prices will continue to soar in the next six months as lead time stretches up to 12 months. The glove companies' earnings will be further boosted by expanded margins as raw material prices remain low, selling prices continue to grow, US dollar (USD) continues to strengthen over the Malaysian ringgit (MYR), and expansion plans remain intact for the glove producers," said Ms Nafisah. 

In light of the recent spike in Covid-19 cases worldwide, AmBank has raised its ASP assumptions for Malaysia-listed glove producers including Top Glove, Hartalega and Kossan. 

The research team has maintained its "buy" call on Top Glove with a higher FV of RM25.69 per share. As at 11.39am on Tuesday, Top Glove, which is dual-listed in Singapore and Malaysia, was trading at RM20.32 on Bursa Malaysia, up RM0.36 or 1.8 per cent. The counter was trading at S$6.60 on the Singapore bourse, up S$0.10 or 1.5 per cent.

Meanwhile, AmBank has maintained its "hold" recommendation for Hartalega with a higher FV of RM16.23 per share, and retained its "buy" call on Kossan with a higher FV of RM12.51 per share.

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On the Malaysian stock exchange, shares in Hartalega were trading at RM16.74, up RM0.24 or 1.5 per cent, while shares of Kossan were trading at RM10.78, up RM0.40 or 3.9 per cent. 

According to AmBank, the higher demand for medical gloves has resulted in a supply shortage, thereby pushing up their ASPs.

"ASPs are trending upwards and glovemakers now guide for more than 5 to 15 per cent quarter-on-quarter gradual increases, while spot selling prices for gloves skyrocketed 100 to 400 per cent in the past few months as panic buying of gloves ensues," said Ms Nafisah.

In addition, the research team noted that total rubber glove export value from Malaysia grew 21.4 per cent year on year to RM6.87 trillion (S$2.24 trillion) in January to April, with this upward trend likely to continue well into 2021, until a Covid-19 vaccine is available to the masses.

Beyond the pandemic, AmBank anticipates a structural change in the way gloves are used, forming "a new normal where glove usage per capita will increase as hygiene measures become stricter". This is expected to apply not only in the healthcare sector, but across different industries such as food and beverage as well. 

AmBank's house projection for the USD/MYR rate is an average of RM4.29 in 2020 and RM4.25 in 2021. 

"We think that a stronger USD will even help further expand net margins for glove companies because unlike pre-Covid-19 times, cost savings are not passed through to customers due to supply constraints," AmBank noted. 

That said, the research team forecasts that the ASP of rubber gloves will face a downward pressure in 2022 assuming full containment of the virus then, due to a lower urgency of orders, and with a higher supply of gloves from expanded capacity.

"Big glove producers have plans to increase capacity by 16 per cent in 2020E, 11 per cent in 2021F and 10 per cent in 2022F. This will add 74.6 billion pieces (+40 per cent) of capacity by end 2022. Although this bodes well in terms of ability to cater to higher volume of orders for the next one to 1.5 years, we think that short-term supply glut will come back into play in 2022F," AmBank said.