KUCHING: Covid-19 will have a positive impact on earnings for the rubber products (gloves) sector, analysts project, given the recent demand surge due to the outbreak.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) is expecting a stronger 2020 for the rubber sector, as the research firm believed that the sector would likely benefit from stronger demand arising from Covid-19 and a weak ringgit against the US dollar.
“We are raising our sector earnings forecasts for 2020 by two to three per cent, as we are expecting stronger earnings growth in the first half of 2020 (1H20) arising from stronger demand due to the outbreak of Covid-19,” AffinHwang Capital said.
“Our channel checks indicate that the lead time for delivery has increased from the average 30 to 45 days in early January 2020 to more than 60 days recently (some have guided that their lead time is now at four months).
“With most manufacturers already operating at above 85 per cent utilisation rates, manufacturers should have the flexibility to increase selling prices, which could lead to better margins, in our view.”
According to AffinHwang Capital, despite the recent surge in demand for rubber gloves, manufacturers are sticking with their current expansion plans, where the research firm expected total capacity by the Big 4 to increase by 11 to 12 per cent in 2020.
The research firm believed that manufacturers will continue to act rationally, as the current surge in demand may not be sustainable, and a significant increase in capacity over current levels might lead to an overcapacity in the following years.
“The average demand growth for rubber gloves is around six to eight per cent a year. Historically, in years where there is a surge in demand due to a pandemic, a slowdown is expected in the subsequent year, as inventories are worn down.”
Taking into account the recent demand surge due to Covid-19, AffinHwang Capital has revised its sector earnings forecasts higher by two to three per cent for 2020.
The research firm noted that consensus also upgraded their forecasts by three to four per cent higher for 2020.
“Our forecasts have only taken into consideration that demand from Covid-19 will last for three months (February to April), hence there could be more upside if the strong demand sustains.