Kenanga Research & Investment says maintaining OVERWEIGHT rating for the rubber gloves sector, despite unjustifiable sell-off of rubber glove maker stocks.
“Rubber glove stocks under our coverage suach as Top Glove, Supermax, Hartalega and Kossan have performed poorly. But we are not perturbed and expect the sector to recover and even outperform in subsequent quarters.
“This is based on our analysis that the new capacity expansion is slower-than-expected, which should help maintain the supply demand equilibrium and
ultimately dispel market skepticism of a potential oversupply situation.
“We expect earnings growth to resume in subsequent quarters, underpin by new capacity expansion fueled by sustained demand for rubber gloves, led by latex
gloves, although nitrile gloves, which have been consistently taking up the former’s market share, will continue to show better growth prospects
“Also the weakening of the Ringgit against the US dollar, and the sustained low raw material prices is positive to rubber glove players”, said Kenanga in its research note.
Kenanga top pick is Supermax because it is trading at 11.4 times financial year (FY) 2014 earnings per share compared to an average 15 per cent net profit growth over the next two years
It believes the re-emergence of Employee Provident Fund (EPF) as a substantial shareholder of Supermax eliminates some uncertainty and helps lends credibility to its business model and management.
Supermax is trading at 11.4 times FY 2014 earnings while Kossan is trading at 14.7 times FY 2014 earnings.
Kenanga believes the valuation gap should narrow when we consider that Supermax’s capacity and net profit are at levels similar to Kossan, Hence it also has OUTPERFORM calls for Kossan and Hartalega.
“The optimism is based on our analysis that the slower-than-expected new capacity expansion should help keep supply-demand in equilibrium and ultimately dispel market skepticism of an oversupply situation.”
Kenanga noted tell-tale signs of oversupply concerns appear overplayed considering that capacity expansion of the four rubber gloves under coverage are expected to be delayed and staggered.
Kossan’s 5 billion pieces capacity will only gradually be ramped up starting from March 2014 from first plant and the other two plants will commence in May-June 2014 (net increase in new capacity for 2014 is 2.5 billion pieces).
Supermax’s new plant with an estimated 5.3 billion pieces will only start ommercial operations end second quarter 2014 with an estimated net incremental increase of 2.5 billion pieces.
Top Glove is scalling back and only expects 2 billion pieces new capacity by end 2014. Meanwhile, Hartalega’s plant is only expected to commence commercial production by fourth quarter 2014 with a net incremental increase of 2 billion pieces by end 2014.
Kenanga said there are no worries on potentially higher energy cost going forward.
“Ceteris paribus, the recent hike in electricity tariff is expected to hit rubber gloves players’ earnings by 2-3 per cent. However, we are not overly concerned since rubber gloves players generally were able to pass on the cost increase judging from past experience during electricity and natural gas tariff hikes.
“Electricity cost accounts for an estimated 20-30 per cent of fuel costs which in turn make up 10 per cent of total production costs of rubber gloves players. Natural gas accounts for the remaining 60-70 per cent. From our observation, earnings of rubber gloves players were not impacted from the hike in gas and electricity tariff back in 2011.”
Source: The New Straits Times
Published: 25 Mar 2014