Smooth sailing ahead for rubber industry
KUCHING: Analysts are generally bullish on the performance of the rubber products sector for the year ahead, underpinned by its strengthening fundamentals.
In a strategy report for 2017, the research arm of CIMB Investment Bank Bhd ( CIMB Research) highlighted that external environment in terms of a strong US dollar is once again in the favour of glove manufacturers, coupled with sector’s better supply-demand dynamics.
In addition, it pointed out that the sector’s risk-reward profile has turned attractive.
“Moving into 2017, US dollar is expected to further strengthen given potential Fed rate hikes on the cards and possible bond outflows.
“This will lead to a more conducive environment for glove makers to operate in, in our view,” the research firm opined.
It added, as the ringgit has depreciated more against the US dollar compared with other glove manufacturing countries, this is expected aid in the competitiveness of Malaysia’s glove sector globally.
“Hence, we expect more demand for glove exports, leading to better supply-demand dynamics.
“This will alleviate the persisting pricing competition as additional demand will take up the excess capacity that led to the oversupply situation in the first nine months of 2016 (9M16),” it remarked.
Meanwhile, on the glove sector’s average selling price ( ASP), Maybank Investment Bank Bhd’s research arm (Maybank IB Research) believed that while high raw material prices might persist into 2017, the earnings growth momentum could be sustained in the first half of 2017 (1H17) due to the cost pass through mechanism and the presently high US dollar against the ringgit.
“However, over- expansion and intense ASP competition could recur in 2H17, leading to compression of margins/ earnings again,” it cautioned.
It added, “As we expect the demand-supply situation to be relatively balanced in 1H, we believe that the glove producers can pass on the higher costs in two to three months.
“However, come 2H17, the higher costs could take longer to pass through, when massive capacity kicks in at the same time, hence, margins may erode.”
On the other hand, CIMB Research believed that although concerns over aggressive ramp-up
Moving into 2017, US dollar is expected to further strengthen given potential Fed rate hikes on the cards and possible bond outflows. CIMB Research
in sector’s capacity in the next two to three years still persist, glove makers have committed to take preventative measures to mitigate the oversupply situation.
“Top Glove and Hartalega have indicated plans to begin commercial production from their new lines on a more gradual basis, subject to market’s supply-demand dynamics. Furthermore, Kossan may further undertake revamp works on its older lines, offsetting the new capacity coming onboard if pricing pressure persists,” it opined.
As for the outlook for the overall rubber products sector, RHB Research Sdn Bhd (RHB Research) expect rubber product manufacturers to record stronger earnings for 2017.
This is on the back of improving industry demand-supply dynamics as well as the resumption of capacity expansion.
“The recovery in the cost passthrough mechanism has allowed manufacturers to raise glove ASP (three to five per cent hike in glove ASP at the end of June 2016) to successfully offset the increment in labour costs (minimum wage hike 11 per cent to RM1,000 as of July 1) as well as utilities costs (gas tariff hiked six per cent to RM27.05MMBtu as of July 15) at the end of July.
“We believe this would help sustain operating margins given the higher raw material costs in 4Q16,” it said.
The research firm forecast the 2017 Malaysian supply to grow 11.8 per cent year-on-year (y-o-y), which is higher than the generally accepted global glove demand growth of six to 10 per cent per annum.
“Assuming no delays in scheduled capacity expansion plans, we opine that there is a possibility that the industry’s demand-supply dynamics might be disrupted towards the end-2017/ beginning 2018,” it added.
All in, RHB Research said, “We believe industry fundamentals are improving after the competitionled ASP pressures in 1H16.
“Healthier demand- supply dynamicswillallowmanufacturers to pass on incremental cost and sustain operating margins.
“This would be timely given the higher raw materials cost in 4Q16. The stronger US dollar foreign exchange (forex) would also be a boon as rubber manufacturers are predominantly exporters and hence, net US dollar beneficiaries.
“Nonetheless, we maintain our ‘ neutral’ recommendation on valuation grounds.”
Similarly, Maybank IB Research pegged a ‘neutral’ view on the sector. On the other hand, CIMB Research maintained its ‘overweight’ call on the sector.
It explained, “With improved supply- demand dynamics and a more favourable operating environment from the weak ringgit, the worst is over for the sector, with glove makers set to record sequentially stronger earnings moving forward.”