Upgrading Rubber Gloves to OVERWEIGHT from NEUTRAL. We raise
our ratings and target prices on the individual stocks as well (see details in
next page). The main reason for the upgrade are; 1) falling latex prices; 2)
strengthening of USD against MYR recently. These two factors should boost the
earnings of glove companies if their trends persist. Should latex prices fall
further by another 25 sen from our assumed price of RM7.00/kg, it could boost
the net profits of players in the sector by another 11-27%. In an earlier
report, we had revised up our earnings projections for glove companies by 5-29%
when we raised our assumptions to RM3.09/USD from RM2.85/USD for FY12. We
reckon glove companies’ earnings could see an upside bias ahead and lead to a
re-rating for glove stocks in 3Q12, particularly for Top Glove Corporation
(“TOPGLOV”), Supermax Corporation (“SUPERMX”) and Kossan Rubber Industries
(“KOSSAN”), which have the most exposure to natural latex glove production. Our
top picks for the sector are TOPGLOV (OP; TP: RM5.80) while recommending
OUTPERFORM on SUPERMX (TP: RM2.50) and KOSSAN (TP: RM3.64). Hartalega Holdings
(“HARTA”; MP; TP: RM4.42) may potentially see increased interest as well.
Favorable trends for
rubber glove industry. Since latex price peaked during the winter season
(around Feb-April 2012), it has now fallen 13% from its highs. We expect prices
to stabilize at this stage at around RM7.00/kg, which would be relatively lower
than its peak earlier this year. We understand that there are actually an ample
supply of natural rubber coming from the additional plantations in neighboring
countries like Cambodia and South Vietnam. In addition, latex traders are also
expected to continue to release their stocks to unlock their cash flows, which would
lead to persistent pressure on latex prices.
Continuing downtrend
of latex prices a boon to players. We believe the continuing downtrend of
latex prices will be a boon to glove players, particularly those with
significant exposure to the production of natural latex gloves. Our estimate is
that there will be potential earnings boosts for these players in the range of
11-27% (depending on the size of their exposure to latex usage) for every 25
sen drop in the latex price from our
assumed price of RM7.00/kg. Note here that HARTA will not see much of an impact
to its earnings given its substantial exposure to the nitrile glove segment;
hence we maintain MARKET PERFORM on HARTA (TP: RM4.42). That said, glove
players have recently move to super-thin gloves (3.5g), which is similar or in
line with nitrile powder free gloves; we are monitoring the trend closely as it
has implications on natural rubber latex consumptions. Meanwhile, we continue
to believe that the overall demand growth for gloves still remains healthy,
allowing glove makers to continue being price makers and passing on any cost
increases to customers.
Stronger USD helps as
well. Apart from the favourable latex price, we also see a stronger USD against
MYR; currently, the USD has appreciated by
7% to RM3.19/USD from its low of RM2.99/USD early this year. As the USD
strengthens, there will be a positive impact to the glove makers’ bottom lines
as more than 90% of their sales are exports sales. As noted above, we had in an
earlier report, upgraded our earnings projections for glove companies by 5-29%
after raising our USD/MYR assumption to RM3.09/USD from RM2.85/USD for
FY12.
Source: Kenanga
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