Higher prices, capacity expansion to underpin earnings growth
KUCHING: Higher average selling prices (ASP) and capacity expansions by various rubber product producers are expected to boost the rubber sector’s earnings growth in 2017.
Affin Hwang Investment Bhd (AffinHwang Capital) noted that it expected the rubber sector’s ASPs to increase up 10 to 15 per cent while expansions by rubber product producers are expected to be in line with growing demand.
“Looking into 2017, we expect sequentially improved earnings to be underpinned by the revisions in ASP and firmer volume growth. US dollar strength could also sustain earnings growth, but could taper towards the tail end of 2017 in line with our house view projection of RM4.10 per dollar by end-2017.
“Most glove manufacturers have already guided for a 10 to 15 per cent increase in glove ASPs, in tandem with the rally in raw material prices, as part of the cost-pass-through mechanism,” the research team said.
“Capacity expansion looks controlled in 2017, with expansion from Top Glove Corporation Bhd (six billion), Hartalega Holdings Bhd (five billion), Kossan Rubber Industries Bhd (three billion) and Supermax Corporation Bhd (two billion).
“This implies eight per cent growth over the 2016 estimated global glove usage of 190 billion, which matches our projected growth of six to eight per cent in demand.”
Nevertheless, the research team pointed out that the effective supply could come in lower than expected, pending the utilisation rates and commissioning dates.
“We believe the supply growth could taper to five per cent on an effective basis, which bodes well for higher ASPs, and for the effective functioning of the cost-pass-through mechanism,” it said.
Looking further ahead, in 2018, AffinHwang Capital noted that there are no major changes for capacity expansion next year, save for the delay in Kossan’s Bestari Jaya Phase One factory, which would have added 4.5 billion in 2018.
“We do not discount further delays in Supermax’s expansion, and this is likely to bode well for the sector as a whole in the further easing of capacity additions,” it added.
Overall, the research team believed that the industry’s supply and demand dynamics would be well-balanced heading into 2017, as staggered expansion and timing delays in new capacity commissioning would allow better supply absorption.
Aside from that, it said, “We expect ASPs to remain stable with an upward bias on the back of moderating pricing pressure, as well as to account for the increase in raw material prices.
“We are unperturbed by the escalation in raw material prices, given that glove manufacturers are still proactively passing on the bulk of the costs via costpass-through, albeit with a slight time lag.”