100% jump in glovemakers’ shares has further room to run

Some glove makers have an order backlog running till June 2021, compared to just one month before the pandemic. (Bloomberg pic)

SINGAPORE: Northcape Capital Ltd, one of the largest shareholders of this year’s top gainers in Asia — Top Glove Corp and Hartalega Holdings Bhd — says the two stocks have further room to run.

The pandemic has caused a structural change in demand for gloves, so earnings at some makers will double in each of the next two years and drive their stocks to outperform, according to Ross Cameron, a fund manager at Northcape, which overseas about $7 billion (RM30 billion) in assets globally.

“The duration of super-normal demand is still longer than most people realise,” Cameron said.

Factors that will continue to support the share rally include product price increases and the fact many nations are ill-prepared for pandemics, he said.

Shares of the world’s biggest glove makers Top Glove and Hartalega, both listed on Malaysia’s bourse, have soared 257% and 136% this year, respectively, making them the top gainers in MSCI Inc’s broadest gauges of stocks listed in Asia and emerging markets.

Their rally has vaulted the two firms into the list of top companies in Malaysia and driven their valuations into uncharted territory.

Northcape, an Australia-headquartered asset manager that has been investing in the shares of glove makers for more than a decade, bought more glove-makers’ shares early this year “when signs emerged that Covid-19 would become a global pandemic”, Cameron said.

According to his calculations, Top Glove will generate average earnings growth of more than 100% for each of the next two years while Hartalega will also deliver “exceptionally strong” earnings growth as personal protective equipment purchases increase globally.

Some glove makers have “an order backlog all the way out to June 2021”, compared with one month before the pandemic, he said.

The discovery of a vaccine to prevent Covid-19 disease will also help keep demand elevated because “glove companies and some experts have noted that the widespread administering of a vaccine will actually result in a further spike in glove demand”, he added.

Shares in Top Glove and Hartalega are trading close to their record valuations, based on 12-month forward estimated earnings, according to data compiled by Bloomberg.

Analyst price targets have failed to keep pace with rapid stock gains.

Cameron said that “analysts are still behind the curve in updating their estimates, which is why the stocks look expensive on a headline basis”.

Most of the analysts “still underestimate how high margins could go in this environment”, he added.

Northcape’s earnings estimate for Top Glove for the fiscal year 2021 is more than 60% above the Bloomberg consensus estimate.

This puts Top Glove on a forward price-to-earnings ratio of just 23 times, Cameron said.

That compares with 37 times based on estimates of analysts tracked by Bloomberg.

“There are very few companies globally which can deliver anything close,” he said.

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