Analysts still bullish on rubber glove stocks

gloves factory in malaysiaKUALA LUMPUR – Analysts are still bullish on rubber glove stocks and consider them low risk despite the increase in electricity and natural gas tariffs.

Effective immediately, the government raised electricity rates by 7 per cent. There is also a 20 per cent price hike for natural gas across industries.

Heavy gas users like some steel millers, petrochemical, and oleochemical fertiliser producers, who consume more than two mmscfd (million standard cubic feet per day), will pay RM18.35 per mmBtu (million metric British thermal unit) instead of RM15.35/mmBtu previously.

The last time the government raised gas prices was in August 2008 by a hefty 72 per cent to RM22 per mmBtu from RM12.80 per mmBtu.

After much complaints, the government, in March 2009, lowered the gas tariffs by 30 per cent to RM15.35 per mmBtu.

Since the changes have taken effect, rubber glove manufacturers using less than 2mmscfd will need to pay the new rate of RM16.07 per mmBtu. This is 7 per cent more than the old RM15.00 per mmBtu rate.

Fiona Leong of Citi Investment Reseach is keeping her earnings forecasts for glovemakers unchanged because the 20 per cent gas price hike would only raise operating costs by 0.7 per cent, if there is no cost pass through.

In her note to investors, she said the hike would have a small knock on earnings of glovemakers for June and July because selling prices for deliveries had already been firmed up.

But glovemakers are hopeful of passing on the higher fuel costs as the gradual easing in natural latex price gives room for price adjustments. Bulk latex price has retreated by 11 per cent from an average of RM10.45 per kg in April to RM9.43 per kg in May.

Leong noted that rubber glovemakers face sharp volatility in latex price and the stronger ringgit. This would hamper accurate adjustments of selling prices.

Jason Yap of OSK Investment Research said given that the quantum and timeline of the hike of every six months until 2015, rubber glove manufacturers would be able to make adjustments to their gloves prices in advance and pass on the energy cost increase to their customers.

His top picks include Top Glove Corp Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd.

He has valued Top Glove at RM6.50 and expects Supermax to rise up to RM6.91. His target price for Kossan is RM5.

Yap said the companies are the main beneficiaries from easing of latex price as they have higher natural rubber glove mix.

Source: Business Times