Rubber products sector to see overall improvement in 2017
KUCHING: The rubber products sector is expected to see an overall improved operating environment this year, analysts say.
According to Affin Hwang Investment Bank Bhd (Affin Hwang), contrary to the consensus view, the research firm expected an overall improved operating environment in 2017, on the back of capacity discipline by glove manufacturers and well-matched growing glove consumption on rising healthcare awareness.
Affin Hwang estimated the top three glove manufacturers - Top Glove Corporation Bhd ( Top Glove), Hartalega Holdings Bhd ( Hartalega) and Kossan Rubber Industries Bhd ( Kossan) - to commission up to 5.7 billion gloves in capacity net adds in 2017, after taking into account the staggered expansion and timing delays.
“Global glove demand is projected at 11.4 billion net adds, based on an estimated six to eight per cent annual growth, which is at least double that of the top three supply growth,” the research firm said.
This should promote healthy demand absorption while minimising pricing volatility, in Affin Hwang’s view.
“That aside, tailwinds from the ringgit weakness will continue to benefit the industry on a stable US dollar average selling price (ASP) outlook, by boosting Malaysia’s pricing competitiveness in keeping utilisation high and
Global glove demand is projected at 11.4 billion net adds, based on an estimated six to eight per cent annual growth, which is at least double that of the top three supply growth. Affin Hwang
sustaining market share gains,” it added.
However, Affin Hwang highlighted that rising raw material prices is a cause for concern, as it constitutes at least 50 per cent of total production costs.
The research firm has nonetheless pointed out that the high acreage of rubber plantations maturing should keep a lid on rising prices with higher supply in 2017.
Affin Hwang projected the natural rubber price to average at RM5.00 to RM5.50 per kilogram ( kg) in 2017, significantly lower than the last close of RM6.46.
It noted that the recent Bank Negara Malaysia ( BNM) ruling to convert 75 per cent of US dollar proceeds is a non- event, and largely an administrative nightmare.
“The levy on foreign workers will be an additional cost to manufacturers, but is well- contained with only a three per cent impact on sector earnings,” the research firm said.
“Rising production costs remain a perennial issue, but improving efficiencies and growing automation should buffer the unrelenting cost pressure at the very least, keeping margins in check.”
Overall, Affin Hwang projected that 2017 is shaping up to be a recovery year for glove manufacturers after a whirlwind 2016.
“With a stable US dollar ASP outlook, incremental volume will likely sustain topline growth, while margin should normalise at a higher level on improving productivity,” it said.
As such, Affin Hwang retained the sector at ‘neutral’, largely to account for the rich valuation at 19- fold current year 2017 estimate (CY17E) earnings per share ( EPS).
Affin Hwang expected Top Glove to be the biggest beneficiary in the event of a US dollar ASP recovery, given the group’s huge production base and 10 per cent volume compound annual growth rate (CAGR) for financial year 2017 to 2019 estimate (FY17-19E).
The research firm also liked Top Glove for the group’s ongoing automation and operational improvement initiatives, which should continue to sustain margin expansion.