Glove makers tumble
Weakening US dollar and rising costs weigh on stocks
PETALING JAYA: Shares of glove makers have been facing sell-down pressure amid lofty valuations, following expectations of a weakening US dollar, guidance on supply-demand imbalance and rising costs.
Since last Friday, glove makers like Hartalega Holdings Bhd, Top Glove Corp Bhd and Kossan Rubber Industries Bhd have sold down by 12.5% to 18.4%.
UOB Kay Hian, which maintained its “underweight” call on the rubber glove sector, believes the sell-down is unjustified based on well known factors.
“The sell-down resonates with our sentiment over a possible derailing of fragile lofty valuations over negative developments.
“The factors that developed over the weekend, though unjustified, serves as a reminder of downside risks to lofty valuations,” said UOB Kay Hian.
The research house said glove manufacturers’ earnings could increase by 6%, for every 1% depreciation of the ringgit to the US dollar.
However, this analysis does not include the shared cost savings mechanism with customers, which moderates any significant gain in profit margins.
Based on the current exchange rate, UOB KayHian cautions that there may be some downside to its earnings estimates for the glove manufacturing sector, given that its foreign exchange assumption is based on an average of RM4.23 per US dollar, over the next one to two years.
Apart from that, the surfacing guidance from rubber glove companies on supply-demand imbalance has already been well factored in by the market.
“Rubber glove companies have been guiding on their capacity outlooks for the next two years in detail.
“While the first signs of slowing demand emerged in the third quarter of 2018, there seems to be a disconnect between the supply-demand imbalance and the recent selldown,” said UOB KayHian.
In a separate note on Hartalega, while CGSCIMB attributes the recent sell-down of Hartalega shares to keener competition in nitrile glove segment and risings cost, the research house is not overly concerned about the recent strengthening of the ringgit against the US dollar and various cost hikes in 2019, such as the 0.7% higher gas cost and 10% minimum wage hike.
This is because there will be negligible impact on profit margins, offset by the recent decline in nitrile butadiene prices, which fell 13% quarter-on-quarter in the fourth quarter of 2018, as well as ongoing cost efficiency efforts.
However, Hartalega is not discounting the fact that it may have to lower average selling prices (ASPs) in the event of further intensified competition.
“As we expect keener pricing competition in the nitrile segment, we cut our FY19 to FY21 earnings per share (EPS) forecasts by 0.5% to 1.2%.
“This is to account for lower ASPs from pricing pressure, decline in nitrile butadiene prices, as well as increased gas and labour costs.
“We still expect Hartalega to record a threeyear EPS compound annual growth rate (CAGR) of 16.8%,” said CGSCIMB.
Meanwhile, Top Glove’s Singapore-listed counter was the best performing constituent of the iEdge SG All Healthcare Index for 2018, at a 40.6% growth.
An SGX market update note said rubber glove makers shall continue to benefit from Asia’s increased patient demand.
It said healthcare spending by governments across Asia and in Singapore is set to rise.
“Frost & Sullivan has estimated that the Asia-Pacific healthcare industry expanded at 11.1% in 2018, accounting for 28% of the US$2 trillion global market. This represents one of the fastest growing regions in the world, with the global healthcare economy averaging only a 4.8% annual growth rate,” according to the note.
As of yesterday’s close, shares of Hartalega fell 2.9% to RM5.00.
Top Glove’s share price fell 3.6% to RM4.80, while Kossan Rubber closed 6.2% lower at RM3.64.