Companies such as Top Glove Corp Bhd, Supermax Cop Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhdare among strong beneficiaries from the strong greenback.
Their costs are in Ringgit, while their earnings are mostly in US dollar.
The question now is to bet on the strongest one that will be able to sustain its uptrend beyond the volatile exchange rate euphoria. On this score, Hartalega and Kossan appear to lead the pack, based on analysts reports.
The strengthening US dollar against ringgit that has crossed the RM4.08 mark earlier last week certainly adds another reason that this usually shortlive spurts could be further prolonged, as the recently announced strong economic growth has yet to add strength to the local currency.
The top four players – Top Glove, Supermax, Hartalega and Kossan – derive 90% of their sales in US dollar while a substantial portion of their cost base such as latex, labour and electricity are in ringgit.
Generally their shares have been on an uptrend since the beginning of the year on the back of the exchange rate.
The past six months, Top Glove is leading the pack with gain of over 50% to RM7.49, Kossan up 29% to RM6.83 and Hartalega is at RM8.14.
Only Supermax has lost almost 5% to RM2.10 as at press time last Friday.
In terms of price-to-earning (PE) ratio estimation for this year, Top Glove is expected to be trading at 16.2 times, Kossan at 19.1 times, Supermax at 12.2 times and Hartalega at 27.1 times. The industry average PE for this year is estimated at 18.6 times.
A research house estimated that every 10 sen change against the US dollar will affect calendar year 2016 earnings by 16% for Top Glove, 9% for Kossan and 13% for Supermax.
“We are keeping our ‘overweight’ view on the rubber glove sector, with our top picks being Hartalega and Kossan.
“We believe that the imminent US rate hike will continue to exert further downward pressure on the ringgit. As such, we expect valuations of the rubber glove players – average forward PE of 18 times – to remain inflated as investors seek a safe haven from the weakening ringgit and other GST-affected industries,” said AmResearch in a sector update.
AmResearch said it is projecting earnings growth of 12% in 2016 for Kossan, backed by the full commissioning of its three new plants and overhauls at its older facilities. This should collectively add 3.5 billion pieces or 16% to Kossan’s capacity.
Meanwhile, M&A Securities said Hartalega would continue to strengthen its position as the largest nitrile gloves producer, driven by steady global demand and expansion at its plants.
“Note that Hartalega’s product mix has been around 95% nitrile and 5% latex glove. Demand for nitrile rubber gloves is expected to grow at a high rate of over 19% due mainly to the switching from latex to nitrile rubber gloves.
“But Hartalega would incur higher capex of about RM417mil per year in the next three years due to the expansion of its plants, thus leading to a higher depreciation cost and higher borrowings that would impact its bottom line,” it said.
Meanwhile, M&A Securities continues to like Supermax for its Supermax Business Park with an estimated 40 production lines and production capacity of 15.5 billion pieces per annum as well as the diversification of its revenue stream into contact lens business, with a profitable gross profit margin of up to 60%.
Meanwhile, for Top Glove, Affin-Hwang Capital said the group planned to have an additional production capacity of 6.4 billion pieces per annum by December next year, raising its total lightweight nitrile production capacity to around 16.4 billion pieces per annum.
Nevertheless, JF Apex Securities, despite upgrading the sector to “overweight” from “marketweight”, noted the pricing competition in the industry, particularly in nitrile gloves segment.
“As glove makers are aggressively tapping into and expanding in the nitrile gloves segment, we turned more optimistic on the sector following the tailwinds of favourable foreign exchange and subdued raw material costs.
“We reckon that further weakness in ringgit would serve as a short-term catalyst to the sector,” it said.