Wednesday, April 14, 2010

Glove makers continue to slide

Written by Surin Murugiah
Wednesday, 14 April 2010 00:18

KUALA LUMPUR: Glove manufacturers were among the major losers on April 13, led by TOP GLOVE CORPORATION BHD [] and KOSSAN RUBBER INDUSTRIES BHD [], on concerns over raw material costs after rubber prices jumped to a 20-month high in Japan, and the ringgit’s appreciation against the US dollar.

Top Glove lost 60 sen or 4.4% to RM12.90, Kossan fell 35 sen or 4.4% to RM7.56 and SUPERMAX CORPORATION BHD [] shed 25 sen or 3.6% to RM6.64. LATEXX PARTNERS BHD [] gave up 22 sen to RM3.77, HARTALEGA HOLDINGS BHD [] 18 sen to RM7.60 and ADVENTA BHD [] eight sen to RM3.37.

The FBM KLCI slipped 5.09 points or 0.4% to 1,334.52 on April 13.

Analysts were mixed on glove makers’ prospects following the battering.

MIDF Research said the slump on April 13 was a healthy correction and investors should view any weakness in the share prices of the glove counters as an opportunity to accumulate for short-term trading.

It said the companies’ shares rebounded strongly after receding by 11.9% to 14.4% at end-February and early March, adding there was potential upside as the rubber glove makers’ 1Q10 results were expected to be favourable with potential bonus issues looming.

“We are maintaining our trading buy recommendation and all our target prices (TP) for the glove companies under our coverage. Our TP for Top Glove is RM14.68, based on 17 times EPS10, after factoring its net cash of 88 sen per share.

Kossan and Hartalega’s TPs are RM9.04 and RM8.80 respectively, derived from 14 times and 14.5 times PER,” it said in a note released on April 13 afternoon.

The research house said the outlook for the glove sector remained favourable, adding that with the current demand-supply disparity, glove manufacturers were enjoying better cost-passing power.

Top Glove indicated that it was able to pass on up to 90%-100% of the variance in costs to customers, it said.

“Besides, the time lag for glove producers to pass on the additional costs is shorter now compared with roughly two months previously.

“This is manifested by their sustainable strong earnings margin despite higher latex price and weaker US dollar. We believe that earnings margin should be safeguarded in 1H10 given higher plant utilisation rate and better pricing power,” it said.

MIDF Research said excess supply in 2H10 and beyond was its main concern, as the glove companies it had visited were on track with their expansion plans to cater for increasing global demand.

“Although we are positive on the consistent global glove demand growth, we are also concerned about the potential excess glove production capacity, which we believe will affect earnings margin, and hence lower earnings growth moving forward (we still expect positive growth rate).

“We gather from industry players that excess supply is a risk but it only affects a certain segment, namely the low-end products. This is due to the barrier of entry for the higher-value and R&D-focused products,” MIDF said.

The research house added, however, that its concerns might be eased by stronger-than-expected global glove demand and the delay in the expansion plans.

Other risks were valuation issues, as the three glove companies under its coverage were trading at above their respective five-year average PER, it said.

OSK Investment Research senior analyst Jason Yap maintained his overweight recommendation on the glove sector, and reiterated his buy calls on Top Glove, Supermax and Kossan.

He said the fall on April 13 was a correction, with punters taking profit as the share prices had reached high levels.

“The concerns about raw material costs will also dissipate, as latex price is seasonal and should taper down after May. The companies can also pass on the cost to end-buyers.

“We expect absolute figure of bottom line to be retained but margins to gradually decline because of the higher revenue base if glove makers increase prices to take into account raw material prices or currency exchange,” he said.

Meanwhile, Maybank Investment Bank Bhd head of retail research and chief chartist Lee Cheng Hooi said the rubber glove sector was generally already highly priced, as evident from the fluctuation in prices over the past few trading days.

“The stocks in the sector have had quite a lengthy positive run already. We would recommend investors to take profit and step aside for now,” he said.

Lee said the key support level for Top Glove was RM12.25, Supermax RM6.04, Kossan RM7.19 and Hartalega RM7.62. If prices went below these levels it would be critical, he added.

He said Latexx and Adventa were already trading below their key support levels of RM3.83 and RM3.49, respectively.

Last week, AmResearch downgraded the glove sector to underweight. It noted that demand growth had probably peaked and should decelerate going forward, thus shift of pricing power from manufacturers to consumers would accelerate, exacerbated by additional production capacity as early as mid-year.

AmResearch, which had downgraded Top Glove and Kossan to hold with fair values of RM12.50 and RM7.65, respectively, told The Edge Financial Daily on April 13 it was maintaining its recommendation on the sector and target prices for the two stocks.

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