Rubber Gloves - A glimpse into a more rosy future? Overweight

- Adventa Bhd’s (Adventa) managing director and controlling shareholder Low Chin Huat, along with a private equity firm Southern Capital Group (SCG), yesterday made a joint  offer to acquire Adventa’s surgical glove manufacturing business.

- According to the Bursa announcement, Aspion Sdn Bhd – a special purpose vehicle which is 30%-owned by Low and the balance by SCG’s Mulberry Asia Fund II LP – has proposed an offer price of RM320.85mil, or RM2.10/share. This represents a 40% premium to the stock’s last closing price.

- Based on consensus figures, the offer price translates into an attractive PER of 16x FY12F earnings and 1.5x FY12 P/BV. 

- We view this development positively for the rubber glove industry, as the corporate exercise could signal a more rosy future for glove manufacturers. Indeed, Adventa’s implied earnings yield of 6.25% underlies management’s confidence of better earnings growth from improving demand looking ahead. 

- More importantly, this suggests a similar industry trend, of which we believe bigger players are likely to be the greatest beneficiaries due to better pricing power owing to a stronger brand equity and larger production scale. The bulk of Adventa’s glove output is in natural rubber (NR), accounting for 75%-80% of total production.  

- We maintain our OVERWEIGHT stance on the sector as earnings recovery is still at an earlycycle phase. As we have seen, a falling input cost base notably latex price coupled with the improving overall demand for gloves have helped sustain a recovery in margins. 

- As an indication, SMR20 grade bulk latex price has slumped 26% YoY to RM7.22/kg (YTD) largely as a consequence of:- 1) a slowdown in rubber demand from the global automobile industry and; 2) rising surplus of rubber output on favourable weather conditions. Our latex price assumption stands at RM6.00-6.50/kg for the sector.

- Top Glove Corp (Top Glove) remains our top BUY for exposure to the rubber glove sector as the group is a prime beneficiary of easing latex prices (78% of output in NR). Our unchanged fair value of RM6.30/share is based on a target PE of 19x (0.5SD of its 5-year mean) FY13F earnings.         

- We also maintain our BUY rating on Kossan Rubber Industries (Kossan) with an unchanged fair value of RM4.31/share, based on a target PE of 12.5x FY12F earnings (35% discount to Top Glove’s target PE). We continue to like the group for its less susceptible earnings portfolio as underpinned by its more balanced product mix in both NR and nitrile.   

Source: AmeSecurities