We are currently NEUTRAL on the sector due to the high latex
price, which is eroding the sector margins. While we are cautious on the latex
price trend, the glove players on the other hand believes that latex prices
will ease back later due to the ample supply of natural rubber. Hence, we may
upgrade the sector later if the price situation improves significantly in the
short term. For now, we are maintaining a Neutral rating on the sector in view
of the current high latex price, which is being supported by the Thai
government and a strengthening of RM. For the sector, we have an Outperform
call on Kossan Rubber (TP: RM3.64) and are maintaining our Market Perform calls
on Hartalega (Market Perform; TP: RM8.32),
Top Glove Corporation (Market Perform; TP: RM4.36) and Supermax Corporation
(Market Perform; TP: RM2.06). We retain
an Underperform call on Adventa (Under Perform; TP: RM1.41)
4Q11 results update. The rubber glove companies’ 4Q11 results were
mostly in line with expectations with the exception of Topglove, which exceeded
expectations and Adventa, which saw its results coming in below expectations.
The companies generally recorded flattish quarterly earnings with flat margins
and a small growth in sales QoQ. Topglove however reported a very strong growth
during the quarter (+70% QoQ) with higher margins from 5.7% to 9.7% as it
benefits the most from the positive spread due to the lower latex price.
Stabilizing latex
price? Since the government of Thailand set a minimum price for latex, the
price of latex has surged by more than 11% in the past few months from
RM7.00/kg to a high of RM7.80/kg currently. Although the latex price has
increased, the glove players still expect natural latex price to ease back
later and stabilise in
the long term
as they opined that there is no shortage of natural
rubber latex supply and believe that there is an ample supply of natural rubber
due to the additional plantations in neighboring countries like Cambodia and
South Vietnam. Furthermore, these players expect latex traders to release their
stocks later to unlock their cash flow, and this would suppress the latex
prices.
Currency impact.
The USD has depreciated c.4% to less than RM3.03/USD from an average of
RM3.15/USD three months ago. The
strengthening of Ringgit would have negative impacts to glove makers’ bottom
lines given that most of their sales are denominated in USD. That said,
Thailand, the industry’s nearest competitor, is facing even bigger problems
given the greater volatility in the Thai Baht compared to Ringgit (by c. 6% in the
same period). Meanwhile, Malaysia has not been losing any competitive advantage
to Indonesia as the latter does not have the same production scale and technology
despite its weaker currency exchange against the USD.
Reducing cost via
thinner latex gloves. We understand
that the glove players are moving to super thin gloves (3.5g), which is similar
or in line with nitrile powder free glove. This will reduce the consumption of
natural rubber latex, which accounts for about 50%-60% of the production cost.
Meanwhile, demand growth for gloves remains healthy, allowing glove makers to
continue being price makers and passing on any cost increases to customers.
Maintain Neutral.
We maintain a Neutral rating on the sector given the current higher latex price
caused possibly by the artificial support of rubber prices by the Thai,
Indonesian and Malaysian governments and the continuing strengthening of RM against
the USD. We like Kossan Rubber (Outperform; TP: RM3.64) for its well balanced mix in nitrile and
latex gloves and are maintaining our Market Perform calls on Hartalega (Market
Perform; TP: RM8.32), Top Glove
Corporation (Market Perform; TP: RM4.36) and Supermax Corporation (Market
Perform; TP: RM2.06). We retain an
Underperform call on Adventa (Under Perform; TP: RM1.41).
Source: Kenanga
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