Brokers' take: UOBKH downgrades Malaysia glove sector; Top Glove remains top pick

Published Wed, Mar 17, 2021 · 03:50 PM

UOB Kay Hian (UOBKH) has downgraded its call on the rubber gloves sector in Malaysia from "overweight" to "market weight", while citing Top Glove as its top pick.

On the Singapore bourse, Top Glove shares ended Wednesday 2.34 per cent higher at S$1.75 and on Bursa Malaysia, the counter was up 0.2 per cent or RM0.01 at RM5.25. This was as at 3.20pm on ShareInvestor.

UOBKH has a "buy" rating on Top Glove, with a RM6.30 target price.

In a research note on Wednesday, analyst Philip Wong noted Top Glove as a sector pick due to its "attractive valuations" and the potential lifting of the sale ban by the US authorities that may catalyse valuations.

UOBKH expects Top Glove's quarterly average nitrile average selling price (ASP) to peak in the second quarter this year, with other glove manufacturers to follow in Q3 2021. Following this, ASPs could moderate by 3 to 5 per cent month on month till the end of the year, the report said.

This comes amid delivery lead times shortening to about seven months from 17 months within a quarter, due to the consolidation of orders, fast vaccination roll-outs, as well as incoming new capacity, UOBKH said.

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For the sector as a whole, Mr Wong attributed the downgrade to several factors such as "unparalleled share price surge, normalising valuations after peak quarterly earnings and negative sentiments within the sector that may be too steep to overcome".

"The glove sector earnings are seeing a windfall, but are expected to normalise gradually over the next two years," the report said.

UOBKH has "hold" recommendation for Hartalega, with a target price of RM9.30. It also has "buy" calls for Kossan Rubber Industries and Supermax Corporation, with a target price of RM5 for each counter.

In addition, the brokerage likes Supermax for its "ambitious expansion plans".

"Supermax intends to list on the Singapore stock exchange. But it remains to be seen if there is an element of new shares being issued, which could be dilutive," the report noted.

Separately, glove valuations have moderated over the past six months, almost three to four quarters ahead of anticipated peak quarterly earnings for the second to third quarter this year, said Mr Wong.

This is in contrast to previous glove cycles which suggest that valuations moderate in tandem with peak quarterly earnings. "Therefore, it implies both limited upside and downside," UOBKH added.

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