Glove mak­ers tum­ble

Weak­en­ing US dol­lar and ris­ing costs weigh on stocks

The Star Malaysia - StarBiz - - News -

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.

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