• ASP competition has eased - new capacity well absorbed by new demand.
• Sector will continue to benefit from the strengthening USD.
• Re-rating to continue; remain OVERWEIGHT; BUY Top Glove and Kossan with higher TPs of MYR9.10 and MYR7.20.

What’s New

Share prices of glove producers have appreciated substantially, +23-72% YTD, outperforming the KLCI by 45% on a relative basis. Similarly, valuations have also re-rated upward with 1-year rolling forward PERs of 16-24x presently (from 11-21x in end-Dec 2014).

What’s Our View

The strong share price performance has been driven by both internal (i.e. strong financial results due to higher efficiencies, higher sales volume) and external (i.e. rising USD) factors.

Additionally, ASP competition within the nitrile space has eased in recent months, for the new supply has been well-absorbed by new demand/rising outsourcing orders. The Malaysia glove producers have also marginally raised their ASPs (by <1%) to fully pass on the higher gas tariff hike (effective Jul 2015).

Looking ahead, we expect the glove stocks to still perform well on strong near-term earnings growth, underpinned by new capacities and higher margins due to improved efficiencies and continuous USD strength. We maintain our earnings forecasts for Hartalega and Kossan, but raise Top Glove’s FY8/16-17 EPS by 8-13% in view of its fast capacity expansion ahead.

Hartalega remains a HOLD with an unchanged TP of MYR8.50 (22x 2016 PER). We continue to recommend a BUY on Top Glove and Kossan but with higher TPs of MYR9.10 (+28%) and MYR7.20 (+5%), on higher target PERs of 20x to both stocks (from 17x and 19x), which would still be 10% below our target PER for Hartalega. We expect the valuation gap to narrow principally on relatively stronger near-term earnings growth; the discount to Hartalega is to reflect its dominant position in the nitrile gloves segment.

Source: Maybank Research - 21 Jul 2015