Rubber Glove - OVERWEIGHT - 27 June 2012

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