Head­winds aside, is rub­ber gloves sen­ti­ment ris­ing?

The Star Malaysia - StarBiz - - Companies & Strategies - By ROYCE TAN royc­[email protected]­tar.com.my

THE rub­ber glove sec­tor is not an easy one to fig­ure out for in­vestors.

On the one hand, the head­winds the com­pa­nies in the sec­tor are fac­ing con­tinue to spook some in­vestors.

Most rub­ber glove stocks con­tin­ued to see some mild sell­ing pres­sure this week, amid the sec­tor’s spec­tac­u­lar run over the last two years.

How­ever, most rub­ber gloves en­joyed some re­cov­ery yes­ter­day, end­ing their down­trend. To pGlove for ex­am­ple had been suf­fer­ing nine days of share price de­cline un­til yes­ter­day when it rose by 10 sen or 2.13%.

Not­with­stand­ing the re­cov­ery, rub­ber glove stocks have seen a few bil­lion ring­git wiped out from from them in the first two weeks of this year.

Some lo­cal re­search houses have turned pos­i­tive on the sec­tor, reck­on­ing that it has been over­sold and that the head­winds are not as bad as they seem.

CIMB Re­search is of the opin­ion that glove coun­ters de­serve to be traded higher due to the de­fen­sive na­ture of its busi­ness, in­elas­tic global de­mand for gloves and its ro­bust earn­ings per share (EPS) growth – a three­year EPS com­pound an­nual growth rate (CAGR) of 20.4%.

It main­tained its “over­weight” stance on the rub­ber glove sec­tor.

On con­cerns of over­sup­ply of rub­ber gloves in the mar­ket, CIMB Re­search says its chan­nel checks re­vealed that most of the ex­pan­sion by pro­duc­ers in China and Thai­land are to re­place less ef­fi­cient and older pro­duc­tion ca­pa­bil­i­ties, so they are un­likely to be a ma­jor threat to Malaysian glove mak­ers which are ahead in terms of tech­no­log­i­cal ad­vances.

It also be­lieved that Malaysia’s global mar­ket share will grow be­yond the cur­rent level of 63%, ow­ing to the do­mes­tic glove mak­ers’ higher ef­fi­cien­cies and bet­ter economies of scale.

“This should al­low Malaysian glove mak­ers to cap­ture a big­ger piece of our es­ti­mated global glove de­mand growth of 8.5% to 268 bil­lion gloves in 2019,” the re­search house said.

It added that the strength­en­ing ring­git and cost hike are not much of a con­cern as this will be more than off­set by the weak­en­ing raw ma­te­rial prices such as ni­trile bu­ta­di­ene prices and on­go­ing cost ef­fi­ciency ef­forts.

For every 1% weak­ness in US dol­lar against the ring­git, CIMB Re­search es­ti­mates that net ex­po­sure to glove mak­ers’ earn­ings is only 0.5% to 0.6%. This does not take into ac­count the cost pass-through mech­a­nism that al­lows pro­duc­ers to share cost sav­ings or in­creases.

CIMB Re­search’s top picks are Kos­san Rub­ber In­dus­tries and Su­per­max Corp.

Mean­while AmIn­vest­ment Bank up­graded its rec­om­men­da­tion to “over­weight” from “neu­tral” fol­low­ing a ro­bust growth in de­mand ex­pec­ta­tions, in line with the ex­pand­ing global health­care sec­tor and the in­creased aware­ness on the im­por­tance of hy­gienic prac­tices through­out the in­dus­try, es­pe­cially in emerg­ing mar­kets such as In­dia and China.

It says 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 head­winds for the sec­tor such as con­cerns on over­ca­pac­ity and strength­en­ing of the ring­git aren’t new. AmIn­vest­ment Bank

the Big Three are ca­pa­ble of weath­er­ing it,” it said.

The “Big Three” pro­duc­ers are Top Glove, Kos­san and Har­talega.

Ambank Re­search’s top picks are Top Glove and Har­talega.

Re­search house UOB Kay Hian took a dif­fer­ing view, main­tain­ing its call on the sec­tor as “un­der­weight”, due to the sec­tor’s bell­wether – Har­talega – trad­ing at lofty val­u­a­tions and the emer­gence of de­mand-sup­ply im­bal­ance signs.

It also up­graded its call for Top Glove and Kos­san to “hold” from “sell”.

Citibank is also less san­guine, say­ing that the strength­en­ing ring­git, stronger crude oil prices and the re­duc­tion of ex­po­sure among in­vestors after two great years were among the rea­sons for the dip this year.

It has been cau­tious on the rub­ber glove sec­tor for a while now and its stance is to main­tain the sta­tus quo this year.

“Ma­te­rial pos­i­tive sur­prises need to come through, in or­der to drive an­other round legup in share prices.” Citibank said.

Some fund man­agers con­tacted by StarBizWeek re­main un­in­ter­ested in in­vest­ing in rub­ber glove stocks at cur­rent prices.

Says one: “We are not buy­ing (rub­ber glove stocks). There are more at­trac­tively val­ued stocks on Bursa to­day.”

An­other fund man­ager says the main is­sue is over­ca­pac­ity and the weak­en­ing ring­git.

“There are still some small sell­ing go­ing on (of rub­ber gloves shares).

“Val­u­a­tion is also on high side and many are sell­ing to buy other cheaper stocks,” the man­ager says.

Val­u­a­tion wise, the glove sec­tor is trad­ing at a for­ward price (PE) earn­ings mul­ti­ple of 24.1 times, com­pared with lo­cal eq­uity mar­ket’s PE of 19 times.

Cau­tious stance: Some fund man­agers re­main un­in­ter­ested in in­vest­ing in rub­ber glove stocks at cur­rent prices.

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