KUALA LUMPUR, Sept 25 — Shares of Malaysia's rubber glove makers have sky-rocketed since the outbreak of the H1N1 flu sent global demand for health-protection products soaring.
Higher average selling prices and lower latex costs provided an added boost, with Top Glove rising 103 per cent so far this year, Supermax up 219 per cent, Kossan Rubber up 49 per cent and Hartalega up 200 per cent.
As raw material costs start to rise and margins narrow with the weaker US dollar, is it time to sell stocks of glove makers with valuations reaching unreasonable levels, or should investors continue to accumulate the shares?
"We are positive on the sector," said Andrew Wong, who helps oversee assets worth US$5.01 billion (RM17.5 billion) as AmInvestment Bank's chief investment officer for equity asset allocation.
"If world demand is going to grow, whether it's because of the US healthcare reform or H1N1, and people are more health-conscious, then there is a very good fundamental call on that," he said. "We have Top Glove and Kossan. We're comfortable with their (fundamental) visibility and we're not selling (the shares)," said Wong, who declined to say how much stock in the two glove manufacturers the bank is holding.
Affin Research analyst Wong May Pearl has an "overweight" stance on the sector based on her assumption of double-digit earnings growth in 2010.
Malaysia is the largest exporter and producer of medical rubber gloves, supplying 65 per cent of the world's natural rubber and half of the world's nitrile gloves. Thailand and Indonesia account for most of the balance.
"The rubber glove industry is one of the best performing sectors year-to-date," said Affin's Wong.
"We believe current valuations are still undemanding. We expect glove players to register commendable double-digit earnings growth over the next few years at least, on the back of steady demand growth," she said.
Wong's top pick for the sector is Kossan, which she rates a "buy" with a target price of RM6.05.
According to Thomson Reuters data, 11 out of 14 analysts had "buy" and "strong buy" recommendations on Top Glove, the world's largest rubber glove manufacturer, while 10 out of 12 analysts had "buy" and "strong buy" ratings on sector laggard Kossan.
Some analysts say glove makers' valuations have shot through the roof and most stocks are starting to look expensive.
"If you look at Hartalega and Supermax, these stocks have gone up by 200 per cent, which is beyond fundamental valuations," said Mohd Fauzi Mohd Tahir, head of equities at AmIslamic Funds Management, part of Malaysia's fifth-ranked AmInvestment Bank group.
"It's tough to justify a buy on these stocks," he said.
According to Thomson Reuters data, Top Glove trades at 19 times its 2010 estimated earnings, Supermax trades at 11 times and Hartalega trades at 14 times.
The average PE for the food and household sector is 10.8 times earnings on Malaysia's benchmark index, which is up 39 percent this year.
RHB Research, a member of the country's fourth-ranked RHB Banking group, puts Hartalega's fair value at 9.5 times its 2010 estimated earnings, said analyst David Chong, who has an "underperform" call on Hartalega. — Reuters
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