Headwinds aside, is rubber gloves sentiment rising?
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.