CGS-CIMB Research’s Ong Kang Chuen has maintained his “neutral” call on the rubber glove sector, but highlighted “add” calls on Riverstone Holdings and UG Healthcare (UGHC) with target prices of $2.50 and $1.70 respectively.
In a Jan 12 report, Ong said he believes fundamentals of glovemakers remain strong in FY2021, as a resurgence in Covid-19 worldwide underpin firm demand for gloves.
He revealed that the Malaysian Rubber Glove Manufacturers Association (MARGMA) estimates that the global glove shortage situation will persist in 2021, due to increased usage in the medical field as well as in non-medical industries.
Based on channel checks by CGS-CIMB, Ong said glove average selling prices (ASPs) remain “firmly on an uptrend, which could support strong earnings in quarters ahead.”
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For UGHC, Ong forecasts the company to report a net profit of $30 million for its 2QFY2021, which is 31% higher q-o-q and a massive 54-fold increase y-o-y.
UGHC said its distribution companies’ inventory levels remain low, and have to be managed on a very tight schedule based on just-in-time delivery. He estimates that UGHC’s ASP rose by 10-20% m-o-m in December, and will further increase by 5-10% m-o-m in January and February 2021.
As such, Ong believes that “further ASP uptrend can be supported by the narrowing price gap for gloves between developing and developed countries.”
Separately, Ong forecasts Riverstone Holdings to report a 4QFY2020 net profit of RM275 million ($90.3 million), which is 54% q-o-q and over 7.5 times y-o-y.
He estimates its healthcare gloves’ ASP grew 10-15% m-o-m in December and January, and could likely rise by another 5-10% in February to about US$100 ($133.01) per thousand pieces.
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Riverstone’s cleanroom gloves’ ASP were also raised by 10-15% in January, and currently stand at about US$110 per thousand pieces. He believes the margin expansion trend should continue in coming quarters, as ASP hikes continue to outpace raw material cost increases.
Finally, he noted that glovemakers have seen share price correction of about 30% since November due to vaccine development newsflow, and the share price overhang from the impending lifting of Bursa Malaysia’s short-selling suspension on 1 January.
Currently, UGHC and Riverstone Holdings are trading at 5.2x and 9.4x in 2022 respectively, which “more than prices in earnings normalisation post Covid-19.”
He sees upcoming results announcements in February as a near-term share price catalyst, and said UGHC remains his preferred pick given “its relatively cheaper valuation and our expectations of higher normalised profits, backed by a 59% y-o-y manufacturing capacity expansion expected in 2021.”
As of 2.46 pm, share prices of UGHC and Riverstone were trading at 67.5 cents and $1.40 respectively.