Glove sector’s earnings momentum to remain stable
KUCHING: The glove sector’s earnings momentum is expected by the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) to remain stable as earnings continue to be demand driven.
According to MIDF Research, in the recently concluded earnings season, most of the gloves manufacturers posted earnings that were in line with the research arm’s full-year earnings estimates with the exception of Supermax Corporation Bhd ( Supermax) which recorded the group’s fourth consecutive quarter of earnings disappointment.
However, MIDF Research noted that most gloves manufacturers reported year-over-year improvement in earnings due to the recovery in average selling prices (ASPs) as well as the increase in volume sold as a result of revamp works on older production lines undertaken by most manufacturers.
Hence, the research arm believed that the current momentum will continue for the rest of the year given that demand remains strong at eight to 10 per cent per annum.
MIDF Research highlighted that the absence of new capacity coming from manufacturers such as Top Glove Corporation Bhd (Top Glove), Kossan Rubber Industries Bhd (Kossan) and Supermax since early of this year proved to have caused limited earnings growth for these manufacturers.
That said, the research arm noted that Hartalega Holdings Bhd (Hartalega), Kossan and Top Glove will be adding 2.4 billion, 3.5 billion and 3.9 billion of new capacity respectively in the second half of financial year 2017 (2HFY17) which it opined will assist in earnings growth for the rest of the year.
“Furthermore, some new developments in the industry such as China’s participation in Paris Climate Agreement (PCA) which would drive the switch from vinyl plastic gloves to rubber gloves and the ban on powdered medical and surgical gloves by the US Food and Drug Administration (FDA) which will help to spur additional demand for gloves,” it said.
Meanwhile, MIDF Research pointed out that the raw material prices have been on an increasing trend.
This was due to several reasons including the upcoming International Tripartite Rubber Council meeting between major rubber producing countries i.e: Malaysia, Thailand and Indonesia intended to restore the falling price of raw natural rubber.
Other reasons were the recent statement by China where Chinese carmakers will now invest in hybrid and electric cars and improved demand for the raw materials.
“Due to this, Malaysian Rubber Gloves Manufacturers Association (MARGMA) expects that ASPs for gloves will increase by nine to 12 per cent depending on the glove types to account for these increases,” it said.
In addition, due to the increasing trend, MIDF Research opined that natural rubber and nitrile butadiene prices will settle above RM6.00 per kilogram ( kg) and above US$1,000 per tonne respectively by end-2017.
That said, the research arm did not foresee the increase in ASPs to disrupt demand as it understood that some major glove manufacturers have sold out capacity until December.
“However, the impact of the increase in ASPs will only be seen in the first quarter of FY18 (1QFY18) as typically glove manufacturers will require about two to three months to pass on the cost increases to their respective customers,” the research arm said.
On another note, although a stronger US dollar will boost revenue for gloves manufacturers as the export of gloves are US dollar-denominated, MIDF Research opined that the current stable US dollar condition is more beneficial to the gloves manufacturers in the long term as it provides better visibility in terms of both revenue as well as costs.
“In addition, it will also assist in currency hedging for the gloves manufacturers and reduce potential foreign exchange losses,” the research arm said.
The research arm’s house view with regards to US dollar to ringgit was that the ringgit will continue to fluctuate at current level and settle at RM4.20 per US dollar by end-2017.
All factors considered, MIDF Research reiterated its ‘neutral’ stance on the sector as the research arm remained cautious on the near term prospects for the glove industry.
Despite expecting better performance for the sector this year with US dollar versus ringgit rate remains stable and favourable to glove players, MIDF Research did not discount the potential fluctuation coming from both raw materials price as well as currency which could potentially hurt earnings.
In addition, the research arm was also wary on the potential delay of capacity expansion plans by some of the major glove manufacturers as it could disrupt earnings growth.
“That said, the next leap in earnings and valuation will only happen post-2020 when all the capacity expansion plans conclude and new regulatory policies which could open new demand for nitrile gloves in the future,” it said.