Influx of glove supply likely to dent margins in FY19F
KUCHING: Pressure on margins are expected in the financial year 2019 forecast (FY19F) stemming from the influx of glove supply of the Big 3 producers Top Glove Corporation Bhd, Kossan Rubber Industries Bhd, Hartalega Holdings Bhd.
According to AmInvestment Bank Bhd’s research (AmInvestment), FY19 could see an enlarged supply of gloves by 14 per cent.
However, it pointed out that the expansion will come at a gradual pace.
“As this exceeds the organic demand growth expectation of eight to 10 per cent, we opine the average selling price (ASP) will be slightly weighed down initially. It will take six to 12 months for demand- supply to reach equilibrium,” it added.
On a more positive note, AmInvestment noted that according to the Malaysian Rubber Glove Manufacturers Association (Margma), the rubber glove industry has been growing at an average of eight to 10 per cent for the past 25 years and this growth is expected to continue in FY19.
“The expected robust growth is underpinned by the expanding global healthcare sector as well as the increased awareness on the importance of hygienic practices throughout the industry, especially in emerging markets such as India and China.
“Currently, glove consumption per capita for emerging markets such as India and China is still low at around two to six gloves compared with circa 100 to 280 gloves for developed countries,” it highlighted.
It also believed that nitrile-based rubber (NBR) price could continue to decline due to the falling prices of butadiene, which is an input cost for nitrile gloves.
“As NBR is a key input material for nitrile gloves, this is beneficial to the ‘Big 3’ producers as lower NBR prices will widen the nitrile rubber gloves’ margins,” it opined.
As for the sector’s performance against the movement of the ringgit, AmInvestment noted that although the Big 3 producers benefit from a weaker ringgit as exports make up most of the sales, the recent strengthening of the ringgit against the dollar is minor as the rubber gloves players will be able to pass on the cost to its customers via an upward ASP revision.
“Based on our sensitivity analysis, a one per cent strengthening of the ringgit against the US dollar will impact the bottom line by roughly one per cent for the Big 3 producers.
“Our house end-2019 projection for the US dollar to ringgit rate is 4.04 to 4.06,” the research team noted.
All in, AmInvestment believed that the recent selldown of rubber glove stocks are unfounded as the sector’s fundamentals and growth prospects remain.
“The headwinds for the sector such as concerns on overcapacity and strengthening of the ringgit aren’t new and we believe that as among the largest rubber gloves producers, the Big 3 are capable of weathering it,” it opined.
As such, the research team upgraded its call on the sector to ‘overweight’ from ‘neutral’.