THE BUZZ
Last Friday afternoon, Reuters reported that the world’s top rubber producers, Thailand, Indonesia and Malaysia, have set a support mechanism to intervene if rubber prices fall below USD2.70/kg (approximately RM8.24/kg). The deal was struck last Thursday when officials of the three countries met in Thailand to review measures to support the market. According to the source quoted, the defence price has yet to be determined but had to be sorted out quickly since many rubber producers in these three countries are small farmers. Nevertheless, it was reported that there was no immediate confirmation from the Malaysian government.
OUR TAKE
A quick recap. The rubber price issue has seems to become a major issue. The Thai cabinet has on 24 Jan 2012 approved the scheme to stabilise rubber prices at THB120/kg (or USD3.92/kg) and allocated a THB15bn budget to implement it. However the scheme does not seem to be effective, with rubber prices steadily falling. On 28 Aug, the cabinet granted the Rubber Estate Organization (REO) the approval to borrow THB2bn at 0% interest from the Ministry of Agriculture and Cooperatives. On 18 Sep, the REO was further allowed to borrow another THB30bn at 0% interest from the same Ministry to continue the scheme. Meanwhile, Thailand, Malaysia and Indonesia had in August agreed to trim their exports this year by 300,000 tonnes, or about 3% of the global production, starting from 1 Oct for six months. It is said that Thailand was supposed to have cut back exports by 150,000 tonnes, Malaysia by 40,000-50,000 tonnes and Indonesia by around 100,000 tonnes. The latest development is the intervention price at USD2.70/kg.
May not be an easy task. Although the move involved all three major rubber producing countries, we think it may still face some difficulties mainly due to: (i) most of the rubber producers are small farmers and cutting production means slashed income for them and thus we think it would be quite difficult to implement unless the government(s) have concrete plans and policies to subsidize these producers, (ii) rubber is a commodity that is traded actively on the international financial platform, which means it is open for speculation by any investor around the globe, including hedge fund managers, therefore it would be difficult to support the price if the general market is on the bearish mode.
No earnings revision. We also think that the intervention may not post any significant immediate impact on the glove makers although latex price constitute almost 60% of their production costs. The said intervention price of USD2.70/kg (RM8.24/kg) translates to latex prices of approximately USD1.62/kg (RM4.94/kg) vs the current higher latex prices of above RM6.00/kg. Furthermore, even if Thailand’s scheme can be successfully implemented and stabilise rubber prices at the range of USD3.92/kg (translating to latex prices of USD2.35/kg or RM7.17/kg), it is still within our CY12 latex price assumption and hence, does not hurt the valuation on the glove companies under our coverage.
Last Friday afternoon, Reuters reported that the world’s top rubber producers, Thailand, Indonesia and Malaysia, have set a support mechanism to intervene if rubber prices fall below USD2.70/kg (approximately RM8.24/kg). The deal was struck last Thursday when officials of the three countries met in Thailand to review measures to support the market. According to the source quoted, the defence price has yet to be determined but had to be sorted out quickly since many rubber producers in these three countries are small farmers. Nevertheless, it was reported that there was no immediate confirmation from the Malaysian government.
OUR TAKE
A quick recap. The rubber price issue has seems to become a major issue. The Thai cabinet has on 24 Jan 2012 approved the scheme to stabilise rubber prices at THB120/kg (or USD3.92/kg) and allocated a THB15bn budget to implement it. However the scheme does not seem to be effective, with rubber prices steadily falling. On 28 Aug, the cabinet granted the Rubber Estate Organization (REO) the approval to borrow THB2bn at 0% interest from the Ministry of Agriculture and Cooperatives. On 18 Sep, the REO was further allowed to borrow another THB30bn at 0% interest from the same Ministry to continue the scheme. Meanwhile, Thailand, Malaysia and Indonesia had in August agreed to trim their exports this year by 300,000 tonnes, or about 3% of the global production, starting from 1 Oct for six months. It is said that Thailand was supposed to have cut back exports by 150,000 tonnes, Malaysia by 40,000-50,000 tonnes and Indonesia by around 100,000 tonnes. The latest development is the intervention price at USD2.70/kg.
May not be an easy task. Although the move involved all three major rubber producing countries, we think it may still face some difficulties mainly due to: (i) most of the rubber producers are small farmers and cutting production means slashed income for them and thus we think it would be quite difficult to implement unless the government(s) have concrete plans and policies to subsidize these producers, (ii) rubber is a commodity that is traded actively on the international financial platform, which means it is open for speculation by any investor around the globe, including hedge fund managers, therefore it would be difficult to support the price if the general market is on the bearish mode.
No earnings revision. We also think that the intervention may not post any significant immediate impact on the glove makers although latex price constitute almost 60% of their production costs. The said intervention price of USD2.70/kg (RM8.24/kg) translates to latex prices of approximately USD1.62/kg (RM4.94/kg) vs the current higher latex prices of above RM6.00/kg. Furthermore, even if Thailand’s scheme can be successfully implemented and stabilise rubber prices at the range of USD3.92/kg (translating to latex prices of USD2.35/kg or RM7.17/kg), it is still within our CY12 latex price assumption and hence, does not hurt the valuation on the glove companies under our coverage.
Latex price rebounded but no major concern as yet. We note that latex prices have rebounded recently from the low of RM5.26/kg in August to RM6.42/kg in October (+22.1%). This may partly be due to the announcement made by the three countries to cut exports and replant trees to shore up the market and also the QE3 announcement made by US on 13 Sep which was seen as a stimulus package that will inject more liquidity into the financial market. Besides, heavy rainfall in Thailand and the expected restocking in China after its one week long holiday may also be the factors that support the price. Such conditions may raise concern among investors that the margin of the glove makers could possibly get narrowed and affect their bottomline. However, we are of the view that as long as the latex price is hovering around RM6.00-RM7.00 per kg, it is still manageable for the players. What actually concerns us more is the possibly of the drastic price movement hitting an extreme high level which will eventually tarnish the cost past through mechanism as well as the purchasing will of the glove distributors and/or end users. We shall monitor the prices closely and alert investors if there are any drastic changes.
Maintain OVERWEIGHT. We prefer to maintain our OVERWEIGHT recommendation for Rubber Gloves sector owing to the (i) continuous strong support in glove demand from the developed countries (the US and European countries), (ii) possibly more demand growth from the emerging countries due to their increasing hygiene awareness (Mexico and Brazil), and (iii) the latest results from the glove companies under our coverage were well within our expectations. Having said that, we are maintaining our recommendations for the rubber glove makers under our coverage: Top Glove (BUY, FV RM6.00), Supermax (BUY, FV RM2.70), Kossan (BUY, FV RM4.53) and Hartalega (NEUTRAL, FV RM4.83).
Maintain OVERWEIGHT. We prefer to maintain our OVERWEIGHT recommendation for Rubber Gloves sector owing to the (i) continuous strong support in glove demand from the developed countries (the US and European countries), (ii) possibly more demand growth from the emerging countries due to their increasing hygiene awareness (Mexico and Brazil), and (iii) the latest results from the glove companies under our coverage were well within our expectations. Having said that, we are maintaining our recommendations for the rubber glove makers under our coverage: Top Glove (BUY, FV RM6.00), Supermax (BUY, FV RM2.70), Kossan (BUY, FV RM4.53) and Hartalega (NEUTRAL, FV RM4.83).
Source: OSK
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