According to Affin Hwang Investment Bank Bhd (AffinHwang Capital), as Covid-19 has spread to more countries, demand for rubber gloves continues to increase.
“Although manufacturers have increased their utilisation to above 90 per cent, it is still insufficient to satisfy the spike in demand,” the research firm said in a rubber products (gloves) sector update.
“This has allowed some manufacturers to lock in sales until the end of 2020, which came as a positive surprise to us, as we had previously assumed that demand would normalise by the third quarter of 2020 (3Q20).
“We believe that there is also a high possibility that manufacturers will continue increase the selling price by another five to eight per cent for 4Q20.”
On the low oil price, AffinHwang Capital opined that the rubber glove manufacturers could also be a beneficiary, as prices of its key raw material, rubber (latex and nitrile), do have a positive correlation to the oil price movement.
Given the recent decrease in oil prices by 80 per cent since the beginning of the year, the research firm is expecting lower rubber prices for the next few months.
“Manufacturers will likely hold on to the margin gain from the lower raw-material prices, in our view.
“Rubber cost for both latex and nitrile is around 40 to 45 per cent of its cost of goods sold.”
AffinHwang Capital highlighted that apart from the margin-improving price increases and the drop in raw material prices, the weakening of the ringgit could be another positive catalyst for the sector, as close to 100 per cent of its sales are in US dollar (higher margin).
“As the vaccine for Covid-19 is still being developed, demand for PPE-like gloves will continue to sustain.”
As such, the research firm has also revised its earnings growth for the sector in 2020E to increase by 21.5 per cent from 15.6 per cent.
Source: The Borneo Post