Glovemakers shares up on rising demand

From The Business Times:

OSK Research has an 'overweight' rating on the sector, raising its target prices on some rubber glove stocks

SHARES of rubber glove companies are on a roll right now and will continue to move up, riding on the global outbreak of influenza A (H1N1).

OSK Research Sdn Bhd has an "overweight" rating on the sector, raising its target prices on some rubber glove stocks, in line with recent developments in the industry's spurring demand for rubber gloves.

The local research house organised plant tours to four rubber glove companies last month, namely Top Glove Corp Bhd (7113), Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd.

"For Top Glove, we recommend a buy with a target price of RM8.50 from RM7.40 previously and Supermax, also a buy with a target price of RM3.85 from RM2.69 previously," it said in a report yesterday.

"We are also recommending a buy on Kossan, with a target price of RM4.98 from RM4.48 previously as well as on Adventa, with a target price of RM1.87 from RM1.31 before," it added.

While it has revised its target price upwards to RM5.45 from RM4.10 for Hartalega, the research house has downgraded its call to "neutral" from "buy" previously, given that Hartalega's share price has caught up with the valuation.

OSK Research said demand for rubber gloves from the medical industry remains strong, especially from developing countries.

"But glove supply is still short. Since the H1N1 outbreak has been raised to a pandemic level, the governments of developed countries like the US and Europe have urged all healthcare multinational corps to stock up on rubber gloves, which has created short-term demand.

"Over the longer term, demand is expected to come from developing countries like China, India and Russia, which are gradually increasing their use of gloves," it said.

Also, with the US tightening its Food and Drug Administration regulations effective December 2008, the number of glove defects per batch would need to be reduced to qualify for entry to the US market.

This would reduce the supply of rubber glove exports to the US due to the retention of "unqualified"' gloves at the ports and hence create new sales opportunities for the established rubber glove manufacturers, said OSK Research.

Glovemakers have been making the news recently as stocks to own. Lets keep things in perspective. Lets take a look at the number of H1N1 cases as reported by the WHO worldwide. The following charts are based on that data.



First Chart is the average growth rate of H1N1 cases per day. This tells you over each period, the average number of new cases of H1N1 per day. This chart shows we may have hit the peak of new H1N1 cases in early june. The number of new cases per day may have topped out. It has been declining ever since.



The second Chart shows the percent growth rate of H1N1 cases. This tells you how saturated we are in terms of H1N1 growth. As we get further into this epidemic, we will reach saturation compared to a previous time period. This doesn't tell you much about the number of new cases, but as time goes on, we have a decreasing growth rate which means we are getting into a more mature growth and into inevitably into a decline of H1N1 cases.



This is confirmed by the following compounded daily growth rate between each time period in the third graph. The last graph clearly shows we are not having an increasing compounded growth rate. The compounded growth rate per day is declining.

While there will still be demand for gloves due to the H1N1 epidemic, my feeling is that we have already seen the peak in sales, and the euphoria over the glove makers will die down much quicker than most people think. We are already reporting fewer H1N1 cases per day than in June, so the glove makers probably won't do any better than the current quarter in terms of top line growth due to the H1N1 flu.