AS the gloves rally continues to take centre stage on the local bourse, many would not want to miss the opportunity to make fast, yet high returns. At the same time, the risk is increasing as the share prices of glove players surge relentlessly to their all-time highs.

Technically speaking, the stocks could have been overbought with unjustified valuations. Analysts, however, have continued to raise target prices (TPs) for glove counters as earnings forecasts are adjusted upward, reinforcing the “extremely positive” outlook for the sector.

For instance, the world’s largest glove manufacturer Top Glove, which is trading at above 80 times its price-to-earnings (PER) ratio, has been given a TP of RM13.50 by HLIB Research, the highest among the 22 research houses tracking the stock.

“We increase FY2020-22 earnings by 60%/72%/37% [respectively] to reflect higher average selling prices and utilisation. Furthermore, we take this opportunity to adjust our valuation PER target from 35 times to 41 times, which increases our TP to RM13.50 (from RM7.40),” HLIB Research says in a May 19 note.

There are 16 “buy”, four “hold” and two “sell” calls for Top Glove, according to Bloomberg data.

Year to date, the stock has gained more than 150%.

For Supermax Bhd, its latest strong quarterly financial performance has given a boost to the upward momentum in its share price.

Its net profit doubled to RM72.34 million for the third quarter ended March 31, 2020, compared with RM37.96 million a year ago.

Kenanga Research was quick to upgrade the glove maker’s TP to RM6.60, two days after a revision to RM6 from RM4.50.

Last Friday, the research house upgraded its TP for Supermax further to RM7.60 on the back of an upward revision to its FY2020/21 net profit by 6%/16%, to account for higher margins.

“We expect higher margins going forward due to the higher product mix skewed towards OBM (own brand manufacturing) distribution, which accounts for 95% compared with 70% pre-Covid-19, which we believe had caught us as well as the market by surprise.

“We like Supermax because: (i) the stock is trading at an undemanding 18 times FY2021 EPS compared with expected earnings growth of 68%, and (ii) its OBM model, [from which] it can extract higher margin from distributor prices, compared with the OEM (original equipment manufacturer) model at lower factory prices,” the research house explains.

Supermax is still trading at a discount against its peers with a trailing 12-month (TTM) PER ratio of about 54 times. Kossan Rubber Industries Bhd is relatively lower at 47 times, but Hartalega Holdings Bhd’s TTM PER ratio is on the high side at 77 times.

Among the glove players, loss-making Careplus Group Bhd’s share price has seen the strongest jump of about 500%.

Looking at the recent uptrend in glove stocks, Areca Capital Sdn Bhd CEO Danny Wong is of the view that their valuations are extremely high.

“Although people are looking forward to earnings, there is a limit to the capacity, demand and delivery… This is overstretched, so it caused the ups and downs in the market.”

Rally justified, share prices seen stable

An analyst with a local bank who declined to be named, however, believes the rally is justified.

“Glove players say their orders are up until the end of the year and even the first quarter of next year. As long as the earnings are there, I don’t see why the share prices cannot be supported.

“Only when they [glove players] cannot deliver, then the market may see a trading bubble. So, it depends on earnings and, indirectly, the selling prices [of gloves]. Overall, earnings growth is positive and things are still upbeat,” he says.

Meanwhile, a glove analyst at Inter-Pacific Securities Sdn Bhd notes that not all glove stocks have outpaced their fundamentals, as some are expected to deliver strong results.

“The situation is very fluid at the moment. Demand will continue to be there for the replenishment of stocks. There is also a new pocket of demand from households, hospitals and the food industry.”

Currently, he says, there are two ways to look at the glove sector’s rally. “If you are a trader, you would want to buy at every single dip because the sentiment is so strong. For investors, you should consider cashing out some if you have stocks at hand. If you don’t have, I suggest you look elsewhere.”

Asked if investors should brace for a correction after the spike in share prices, the analyst says he expects share prices of glove companies to remain at the current levels for the short to medium term.

In a May 18 note, Affin Hwang Capital opines that it is still not the time to take profit. “Although the sector PER is currently trading above +2SD (standard deviation) of its historical average, we don’t think that valuations are overstretched yet as there could still be upside risk to the earnings forecasts, given that we have assumed demand to normalise by 2H2021.

“We are not expecting any negative surprises in the earnings of glove companies for at least the next few quarters, as we do not foresee any execution risk. The strong earnings growth would likely help to rerate the sector further.

“As such, we are maintaining our ‘overweight’ call on the sector as we believe there is a high certainty on the sector earnings.”

Will demand for gloves taper off when vaccine is found?

While there are views that the demand could ease if a vaccine for Covid-19 is available,  the local bank analyst is of the view that it is too early to come to such a conclusion.

“When there is a vaccine, the sentiment for gloves will not be so strong, but even with the vaccine, would you stop using face masks temporarily? So, the same goes for the glove sector. It’s too early to say the demand for gloves will drop.”

“Also, we don’t know how fast the vaccine can come out and be mass-produced for global usage. Bear in mind that even with a vaccine, it still has to be tested and you need gloves to do testing,” he says.

Given that glove makers are among the few sectors that are doing well during this pandemic, investors flocking to them may see these counters being supported for now.