KUCHING: The rubber glove sector is presently riding high on favourable factors, most prominently lower costs brought about by falling latex prices in addition to favourable foreign exchange trends as the US dollar strengthens against the ringgit.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) elaborated in a research note yesterday, “These two factors should boost the earnings of glove companies if their trends persist.
“Should latex prices fall further by another 25 sen from our assumed price of RM7 per kilogramme (kg), it could boost the net profits of players in the sector by another 11 to 27 per cent.
“We reckon glove companies’ earnings could see an upside bias ahead and lead to a re-rating for glove stocks in 3Q12, particularly for Top Glove Corporation Bhd (Top Glove), Supermax Corporation Bhd (Supermax) and Kossan Rubber Industries Bhd (Kossan), which have the most exposure to natural latex glove production,” the research team highlighted.
Since latex price peaked during the winter season (around February to April 2012), it had fallen 13 per cent from its highs.
Kenanga Research expected prices to stabilise at this stage at around RM7 per kg, which would be relatively lower than its peak earlier this year.
The research house was brought to understand that there was an ample supply of natural rubber coming from the additional plantations in neighbouring countries such as Cambodia and South Vietnam.
In addition, latex traders were also expected to continue to release their stocks to unlock their cash flows, which would lead to persistent pressure on latex prices.
“Meanwhile, we continue to believe that the overall demand growth for gloves still remains healthy, allowing glove makers to continue being price makers and passing on any cost increases to customers.
“Apart from the favourable latex price, we also see a stronger US dollar against the ringgit; currently, the US dollar has appreciated by seven per cent to RM3.19 per dollar from its low of RM2.99 per dollar early this year.
“As the US dollar strengthens, there will be a positive impact to the glove makers’ bottom lines as more than 90 per cent of their sales are exports sales,” the research team opined.
Kenanga Research’s top sector pick Top Glove was expected to see a higher margin as the company was likely to benefit from the lower latex price, which had fallen by about 26 per cent year-on-year, as well as the appreciation of the US dollar.
This was on the grounds that the glove maker had the most exposure to natural latex glove production (at 59 per cent of its cost) and a projected 15 per cent change in its earnings for every one per cent change in the foreign exchange rate.
Kenanga Research pointed out that this favourable exposure was attributed to Top Glove’s natural rubber to nitrile production mix was in overwhelming favour of the former, hence leveraging on the reduced raw material costs.
“In order to mitigate any latex cost increases in the future, Top Glove has started venturing into the upstream business by acquiring a piece of land with a total area of about 10,000 hectares (net planted area is 8,000 hectares) for its rubber plantation in Cambodia.
“Total capital expenditure (including land, planting activities and facilities) for the project cost is RM160 million, spread over a planting period of six years.” According to Top Glove, the yield per annum was estimated at 4.2 tonnes per hectare.
Based on the research house’s estimate, this would generate between 15 to 20 per cent of Top Glove’s current annual latex consumption.
Hence, Kenanga Research maintained its bullish stance on the sector and maintaining the target price of RM5.80 per share for Top Glove, based on an unchanged targeted price earnings ratio valuation of 17.7 times on FY12 earnings per share.
The target prices for Supermax and Kossan were RM2.50 per share and RM3.64 per share respectively while Hartalega Holdings Bhd (RM4.42 per share) might potentially see increased interest as well, Kenanga Research said.
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