Are Glove-Makers’ Shares Getting Too Expensive?

2020-07-13     thesmartinvestor
Are Glove-Makers’ Shares Getting Too Expensive?

It’s no secret that many industries, such as tourism and air travel, have been adversely impacted by the COVID-19 virus.

But other industries, such as glove manufacturing, have benefitted from the boom in demand.

Governments around the world have announced lockdowns and border closures, and these are causing one of the world’s first self-induced economic recessions.

However, amidst the chaos and confusion, there have been industries and companies that have benefitted from the pandemic.

One such industry is the manufacturing and distribution of rubber gloves for the healthcare sector.

The pandemic has caused a surge in demand for personal protective equipment (PPE), masks and rubber gloves.

With this jump in demand, does this mean the valuations of glove makers are also getting too expensive for investors’ comfort?

All-time high valuations

We looked at three listed glove makers here in Singapore – Riverstone Holdings Limited (SGX: AP4), Top Glove Corporation Berhad (SGX: BVA) and UG Healthcare Corporation Ltd (SGX: 41A).

Riverstone is a global manufacturer of nitrile and natural rubber gloves used in both the cleanroom and healthcare industries. Around 15% of its glove volume is for cleanroom, while the other 85% is for healthcare.

Top Glove is the world’s largest manufacturer of gloves, with a production capacity of 73.4 billion gloves per annum as of 19 March 2020.

UG Healthcare is a disposable gloves manufacturer that sells disposable rubber gloves under its “Unigloves” brand.

Riverstone has more than doubled in share price from S$0.94 to S$2.15 and is trading at a trailing price-earnings ratio of 37.4 times.

Top Glove has soared 188% year to date to S$4.44 and is trading at a whopping 79 times trailing earnings.

UG Healthcare, the smallest of the three companies, has almost tripled in share price from S$0.14 to the current S$0.37 and is trading at a lofty 35 times historical earnings.

An uplift in sales orders

Investors may wonder if these valuations are justified.

Is there too much optimism baked into these share prices?

Riverstone has reported a 16.2% year on year increase in revenue for its first-quarter fiscal year 2020 earnings, while net profit jumped by 54.3% year on year to RM 46.6 million.

The group has also reported a surge in sales orders from both existing and new customers.

Come the fourth quarter of this calendar year, Riverstone’s glove production capacity will be further boosted by 1.4 billion pieces per annum to 10.4 billion.

Top Glove saw a 14% year on year increase in sales volume for its second quarter of the fiscal year 2020 (ended 29 February 2020). Like Riverstone, the group is also seeing new orders from regions such as Europe and the US.

The group’s current utilisation rate is above 90% and can be further ramped up to close to 100%.

Expansion plans have been set in motion some time ago to lift total capacity to 91.1 billion pieces per annum by the end of 2021.

UG Healthcare is also putting in place new capacity of 300 million pieces per annum to its existing capacity of 2.9 billion, for a 10% increase for the financial year ended 30 June 2021.

Tailwinds and headwinds

To be sure, the tailwind arising from the pandemic should carry these companies’ enlarged sales orders through to at least the next year.

Post-pandemic demand may also remain elevated due to new regulations and protocols for individuals and businesses.

An additional tailwind is a fall in prices of butadiene, a key component of nitrile healthcare gloves, which has helped to boost the gross margins for all glove makers.

However, one key headwind is the pricing of rubber gloves.

As these nitrile gloves are commodities, companies will have limited room to raise prices in the long-term, even though there has been a short-term surge in selling prices due to heightened demand.

Get Smart: Do not overpay for optimism

All three glove makers are seeing their valuations rise to stratospheric levels.

While there has indeed been an increased demand for rubber gloves, the rapid surge in share prices and valuations has probably been a tad overdone.

Investors need to be wary of overpaying for optimism.

Valuations can, in the short-run, overshoot business fundamentals.

Although the glove makers represent a business that is essentially “pandemic-proof”, it does not mean that investors should pay any price just to own them.

It is more prudent to err on the side of caution than it is to gun for what may turn out to be short-term gains.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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