There have been
favourable movements in the latex price and currency exchange rate (RM to USD)
recently, which if sustained, could be a boost to the industry players as we
estimate that these players could see their net profit boosted by around
11-27%. The scenario could present trading opportunities on the glove counters,
particularly for Top Glove Corporation (“TOPGLOV”), Supermax Corporation
(“SUPERMX”) and Kossan Rubber Industries (“KOSSAN”), which have the most
exposure to natural latex glove production. We will be monitoring the above
developments and will review our ratings and
target prices should the downward movements be sustained although it’s
too early to make a definitive conclusion at this stage. Our top trading picks
for this scenario are TOPGLOV (UP; TP: RM3.74), SUPERMX (MP; TP: RM2.06) and
KOSSAN (OP; TP: RM3.64). The other players like Hartalega Holdings (“HARTA”;
MP; TP: RM3.12) and Adventa Bhd (“ADVENTA”; UP; TP: RM1.41) will also probably
see some trading interest as well.
Price of latex is
down. In our previous sector report, we mentioned that industry players
were expecting latex prices to ease and stabilise at a lower price from the
peak earlier this year as these players were of the opinion that there were
actually no shortages in the natural rubber latex supply since there was
actually an ample supply of natural
rubber coming from the additional plantations in neighboring countries like
Cambodia and South Vietnam. Furthermore, latex traders were then expected to
release their stocks to unlock their cash flow, which would have continued to
suppress the latex prices. True enough, over the past two months, there was a
downtrend in latex prices. Since the price peaked during the wintering season
(around Feb-April 2012), it has currently fallen 12% from its highs. We expect
prices to stabilise at this stage at c.RM7.00/kg as we reckon that the price
would be monitored and supported by Thailand from falling further even despite
the supply being sufficient.
Sensitivity analysis
on the latex price. Based on our latex price assumption of RM7.00/kg, our sensitivity
analysis (see Chart 3) shows that should the latex price ease further by 25
sen, most of the natural glove players could see a boost to their earnings by
another 11-27% depending on the size of their exposure to latex usage. Note
here that HARTA will not see much impact to its earnings given its substantial
exposure to the nitrile glove segment. The continuing downtrend of the latex
price will be a boon to the glove players, particularly those with significant
exposure to the production of natural latex gloves (with potential earnings
boost in the range of 11-27% for every 25 sen drop in latex prices as
highlighted above). That said, we noted that glove players have recently move
to super-thin gloves (3.5g), which is similar or in line with nitrile powder
free gloves, and this would further reduce the consumption of natural rubber
latex. Meanwhile, overall demand growth for gloves still remains healthy,
allowing glove makers to continue being price makers and passing on any cost
increases to customers.
Currency impact.
Aside from the favourable latex price, we also see a stronger USD against MYR as
USD has appreciated by 7% to RM3.19/USD currently from its low of RM2.99/USD
early this year. As the USD strengthens, we expect some positive impact to the
glove makers’ bottom lines as more than 90% of their sales are exports sales.
Based on our sensitivity analysis (as per Chart 4), the glovemakers should see
an earnings accretion of 5-15% for every 1% appreciation in the USD to MYR. Our
earnings projection is based on our in-house USD/MYR projection of RM2.85/USD
and RM2.95/USD for FY12 and FY13. In fact, there should be an earnings
accretion of 5-29% should the USD/MYR remains at the current level of
RM3.10/USD.
Maintain Neutral.
We could see a potential margin expansion on the glove counters in the quarters
ahead should the latex price and the USD/MYR currency pair trend further down.
The scenario could present trading opportunities on the glove counters
particularly for TOPGLOV, SUPERMX and KOSSAN, which have the most exposure to
natural latex glove production. We will be monitoring the above developments
and will review our ratings and target prices should the downward movements be
sustained although it’s too early to make a definitive conclusion at this stage.
Our top trading picks for this scenario are
TOPGLOV, SUPERMX and KOSSAN. The other players like HARTA and ADVENTA
will also probably see some trading interest as well.
Source: Kenanga
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