Positive outlook for rubber glove sector, says analyst

KUCHING: The rubber glove sector has a positive outlook for the upcoming quarters as earnings recovery is believed to be at an early-cycle and bound to gain momentum on the back of sustained margin revival.

In a sector update, AmResearch Sdn Bhd (AmResearch) analyst Low Soo Fang opined, “We reckon glove manufacturers are poised to reap higher margins from time-lag induced imperfect price adjustments from lower input costs due to easing latex price and the strengthening greenback against the ringgit exchange rate.

“As it is, quarterly earnings before interest, tax, depreciation and amortisation (EBITDA) margins of glove manufacturers are still two to four percentage points below normalised levels, implying upside potential.

“We expect higher margins to kick-in over the next few quarters as cheaper latex costs are fully reflected in average selling prices (ASPs),” she stated.

Despite a sharp drop of over 40 per cent in latex price from an all-time high of RM10.60 per kilogramme (kg), Low saw a further easing in latex prices as imminent due to a worse-than-anticipated rubber glut and weakening demand.

This would extend support for a sustained improvement in margins for glove makers as it is the single biggest cost determinant for rubber glove manufacturers, constituting up to 56 to 62 per cent of total production costs.

Low gathered that China’s stockpile of natural rubber (NR) had been on a progressive rise since August 2011, leading to an estimated surplus of 365,600 tonnes as at end-December 2011.

Even though global rubber supply for this year was forecasted to rise by only half of 2011’s additional production of 610,000 tonnes, this would inevitably exert further downward pressure on latex prices going forward.

China’s dominance in the global automobile industry (with a 23 per cent market share) was expected to grow at a slower rate this year, in tandem with the country’s slower economic growth outlook.

The country’s vehicle sales grew a mere three per cent last year, compared with a robust 32 per cent in 2010. As the world’s automobile industry consumes about 70 per cent of global NR output, the sluggish outlook for auto sales this year would affect NR demand negatively.

With regards to glove makers’ production mix, Low commented, “In our view, the structural shift from natural rubber (NR) to nitrile gloves will continue alongside industry trends as consumers typically tend to migrate upwards along with rising disposable income.

“However, the rate of switching should become less drastic now, given softening latex price. Most encouragingly, prices of NR gloves are currently at some seven to 10 per cent discount to nitrile variants.

“NR gloves were sold at an estimated 12 per cent to13 per cent premium to nitrile gloves in 2011. The reversal in ASPs resulting in a favourable price differential should thus help NR gloves claw back some lost market share,” she stated.

The analyst raised AmResearch’s earnings forecasts by 35 to 48 per cent for Top Glove Corporation Bhd (Top Glove) and two to 10 per cent for Kossan Rubber Industries Bhd (Kossan).

She also imputed in higher utilisation rates, latex price forecast of RM5.50 to RM6 per kg as well as AmResearch’s latest in-house foreign exchange rate (US$1 = RM3.10) for both Top Glove and Kossan.

Choosing Top Glove as the top pick for the sector as the group was a prime beneficiary of easing latex prices, she pegged a fair value at RM6.15 per share (from RM3.10 per share) based on a higher fair price earnings (PE) of 19 times revised financial year 2012 (FY13) forecasted earnings.

With over 78 per cent of total production (37 billion pieces per annum) in NR gloves, Top Glove was regarded as the ‘purest’ and largest NR glove manufacturer. Based on past trends, the stock had seen an upward PE re-rating of eight to12 times during previous periods of declining latex prices.

Low also bumped up Kossan’s fair value to RM4.31 per share (from RM3.38 per share previously) based on a higher fair PE of 12.5 times revised FY12 forecasted earnings.


Read more: http://www.theborneopost.com/2012/01/20/positive-outlook-for-rubber-glove-sector-says-analyst/#ixzz1kif1Z7qS