Feature: Glove sector may revisit 2009 boom on bird flu scare

The rubber glove sector may enjoy the boom time of 2009-2010 again if the current bird flu scare in China develops into an uncontrollable global epidemic, according to analysts.

The H1N1 bird flu virus that caused more than 12,000 deaths between March 2009 and August 2010 lifted the profits and share price of major glove producers.

Share price of Top Glove Corporation Bhd, the world’s largest glove maker, nearly tripled to RM5 at end-2009 from RM1.74 a year earlier. Similarly, Supermax Corporation Bhd’s price jumped six fold to RM1.88 from 32 sen.

While currently shares of glove companies have risen on news flow, analysts said the gains are due to speculative dynamics instead of fundamentals.

The flu outbreak has yet to reach a critical stage. And if it is proven that human-to-human transmission had taken place, spread of the disease could be faster.

"The industry may be rerated if the bird flu gets worse," RHB Research Institute Sdn Bhd analyst Lester Chin told theedgemalaysia.com over telephone.

Glove manufacturers and the investment fraternity believe the outbreak of the H7N9 flu will lead to a short-term spike in demand for rubber gloves and profits for manufacturers.

Supermax CEO/group managing director  Datuk Seri Stanley Thai said the firm is anticipating a "short-term exceptional rise in profits," due to higher demand for rubber gloves amid the bird flu outbreak in China.

Thai said the company has received new enquiries and additional orders from existing customers in China over the last few days. This is, especially, for powdered natural rubber latex examination gloves as the major emerging economy has been a major importer of these products.

Top Glove Corp Bhd managing director K.M. Lee said world rubber glove demand is expected to spike if the H7N9 bird flu in China develops into an epidemic along the proportions of the H1N1 outbreak in 2009 and 2010.

Lee said Top Glove will continue with its glove capacity expansion to fullfill a potential rise of up to three fold in demand for the product in China should the current outbreak gets worse.

Driven by news flow on the H7N9 flu, investors have been quick to accumulate shares of rubber glove companies to capitalise on the earnings growth outlook.

That has helped spurred the price of glove stocks in recent days before profit taking pared gains.

At 12.30 pm today, Top Glove Corp Bhd and Supermax Corp Bhd fell six sen each to RM5.91 and RM2.09 respectively while Hartalega Holdings Bhd fell three sen to RM5.18. Kossan Rubber Industries Bhd rose one sen to RM3.82.

Yesterday (Monday, April 8), Top Glove jumped 24 sen or 4.2% to close at RM5.97, Supermax leapt 13 sen or 6.4% to RM2.15, Kossan added eight sen or 2.1% to RM3.81 while Hartalega  was up eight sen or 1.6% to RM5.21

Maybank Investment Bank Bhd analyst Lee Yen Ling said the research firm is maintaining its "overweight" call on the sector as the bird flu is still in its early stages.

In a note today, Lee said the bird flu has not reached a critical level to have a major impact on glove demand.

"We think the sharp run-up in share prices of rubber glove stocks on news of an outbreak of the H7N9 flu strain last week is purely speculative, as the virus has yet to have any material impact on demand.

"Assuming the H7N9 virus develops into a full-blown pandemic, we believe all glove-makers will benefit from margin expansion," Lee said.

Lee said should the situation worsen, Top Glove will be the obvious beneficiary as it is the only glove manufacturer with significant unused capacity. About 40% of its powdered natural rubber glove capacity is idle, Lee estimated.

This means Top Glove will be able to respond to a sudden increase in glove demand, Lee said.

"Our top pick is Top Glove as it has excess capacity and can readily respond to a potential upsurge in demand. We maintain our earnings forecasts, calls and TPs (target prices) on the rubber glove stocks.

As market sentiment drives prices of rubber glove shares higher, not all investors are raising their bets on these stocks which they say may not generate as much return as other "higher-beta" or more-volatile entities.

A fund manager said the spotlight now is on Johor-themed stocks such as UEM Land Holdings Bhd which may yield more upside compared to rubber glove shares amid pre-election sentiment in the country.

"Valuations for glove shares are OK.. but these are moderate-beta stocks," he said over telephone.

He expects glove producers’ profit margins to be maintained in the long term on higher demand for the product due to the bird flu outbreak. This comes amid still-low and stable natural rubber latex prices.