KUALA LUMPUR (April 2): Investors should take the opportunity to position themselves in glove stocks given their share price weakness over the past few months on the back of still robust demand for gloves.

“We believe the [glove] players’ share price retracements of 50 to 60% over the past few months have been priced in ahead of a gradual price retracement in the average selling price (ASP) trend moving into the second half of 2021 (2H21), presenting a buying opportunity,” said Kenanga Research in a note today.

Among the glove stocks under the research house’s coverage, it said those counters are currently trading at six times to nine times financial year 2022 (FY22) price-earnings ratio (PER) and offering a dividend yield of 6% to 8%.

The research house added that it does not expect ASPs to fall off a cliff in this year despite average lead time being reduced from 300 days in early January 2021 to the still elevated 170 days currently (compared with 20 to 30 days during the pre-Covid-19 period).

The research house's ASP assumption is between US$40 (RM165.70) and US$46 per 1,000 pieces for calendar year 2022 (CY22).

Although sentiment on the sector is diminishing, the research house said the lead times suggest that CY22 demand will remain strong from increased demand brought by heightened hygiene awareness extending beyond the healthcare sector. Incremental volume growth is expected from new users of examination rubber gloves, including nitrile and latex-based ones.

“In our view, from the perspective of a long-term investor, we still see significant value being derived from Malaysian glove players, which command 68% global market share and have consistently evolved and innovated in terms of capacity, products and plant modernisation via automation,” said Kenanga.

Overall, Kenanga maintained its “overweight’ call for the sector and said the target PER of glove stocks is conservatively at a 30% discount to the five-year historical forward mean averaging between 15 times and 28 times with earnings expected to start normalising moving into 2022.

Kenanga Research said its top pick for the sector is Hartalega Holdings Bhd. The research house has an "outperform" rating and target price (TP) of RM17 as the stock is trading at nine times its CY22 earnings per share (EPS) based on an ASP assumption averaging US$46 per 1,000 pieces.

The research house also likes Hartalega due to its solid management and constantly evolving innovative product development.

Other glove stocks under Kenanga's coverage also have "outperform" ratings, namely Top Glove Corp Bhd (TP: RM6.80), Supermax Corp Bhd (RM7.80) and Kossan Rubber Industries Bhd (RM6).

The glove counters rose in morning trade today, with Top Glove trading 14 sen or 3.02% higher at RM4.78 as at 10.15am, making it among the top 10 gainers by value on the local bourse.

Supermax also added seven sen or 1.77% to RM4.02, while Hartalega rose three sen or 0.33% to RM9.05 and Kossan climbed up four sen or 1.24% to RM3.26.