Glove makers delivered disappointing results for the first quarter financial year 2014 (1QFY14) due to weaker-than-expected sales volumes and margin compression.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) in a sectoral outlook yesterday anticipate a mixed operating environment for glove makers with weak latex costs (positive), stable ringgit against dollar (neutral), and slowing glove consumption for the second half.
The sector is trading at its five-year historical average price earning ratio of 15 times currently, it added.
“The stronger ringgit is bad for Malaysian glove exports. In terms competitive advantage, the mid-term outlook remains favourable (better economies of scales) for Malaysian glovemakers.
“However, it could remain challenging in the near term due to a stronger ringgit against key local currencies of glove manufacturing countries, mainly Thailand and China,” it explained.
“This could be one of the reasons for the drop in sales volume in 1QCY14.”
Meanwhile, Alliance DBS Research observed that most glove makers have scaled down or delayed capacity expansion plans to manage the supply and demand imbalances, following signs of slower consumption in 1Q.
To recap, the top four glove makers have been targeting eight to 10 per cent per annum organic
volume growth, but that now seems to be an uphill-task for 2014 after the dismal 1Q 2014 results.
In 2012 and 2013, Malaysian glove exports grew 15 per cent year on year (y-o-y) and nine per cent y-o-y, respectively.
“Nitrile gloves will still have cost advantage,” it believed, adding that demand for nitrile
gloves remains stronger than for natural rubber gloves although the latter’s raw material price has fallen considerably this year.
“We estimate nitrile gloves still enjoy seven per cent cost advantage over natural rubber glove (as of May) before taking into account lower latex and higher fuel requirements for nitrile gloves.
“We believe nitrile glove will remain more competitive as it will benefit from lower rubber input due to the thin structure, and sustainable low synthetic rubber cost following the revolution in the US shale gas industry.
The research house noted that alpha returns may be elusive in the sector, but Kossan Rubber Industries Bhd will outperform thanks to its breakthrough invention of the industry’s lightest (three gram) nitrile glove that complies with US FDA and EU requirement.
“This puts the company at a very competitive position in the slowing glove market.”
On the other players, AllianceDBS Research noted that Top Glove would need at least another year to improve its product mix and competitive advantage, Hartalega’s valuation is unattractive now, and Supermax’s expansion plan still lacks visibility.