Worst likely over for rubber glove sector

PETALING JAYA: According to Affin Hwang Capital, the growth is likely to resume in the coming quarters as glove manufacturers indicated that they have started to increase selling prices to pass on the incremental costs.

Overall earnings for the sector in the second quarter of the year have fallen short of both consensus and the research house’s expectation.

They saw earnings contract 11.5% year-on-year (yoy) in Q2, same situation in the previous quarter.

Delivering only 40% of both consensus and its full-year forecasts, the performance for 1H19 became less than satisfactory.

 “The miss was attributed to lower sales volume (Hartalega) and margin compression for its latex glove product (Top Glove). Post-revisions, we are forecasting a 6.7% yoy sector earnings growth in 2019,” it said.

Affin Hwang maintained its “neutral” call on the sector despite of the weak set of results.

 “Malaysia manufacturers are acting more rationally to prevent an all-out price war, as they are willing to delay or cut capacity to maintain selling prices,” it said.

They believe that the cause of the weaker demand for gloves from Malaysia was partly due to an increase in China glove imports into the US, as buyers stock up in anticipation of the tariff hike.

There are a few challenges limiting the glove manufacturers’ ability to raise their selling price, namely the value perception between latex gloves and nitrile gloves, overcapacity in the latex glove space and the time lag (around 30-45 days) in price-setting, the research house said.

According to the management of Top Glove and Supermax, one of the main contributing factors for the low margin during the quarter was the sharp increase in latex cost, which they were not able to pass on fully through selling price increases.

In Q2, average latex prices were up by 15% quarter-on-quarter.

 “However, we believe that pressure to hike latex glove selling prices has eased, as the latex price has fallen by 13% to RM437.6 per kg from the peak in 2Q19,” said the research house.

The research house noted that as the US-China trade tension intensifies, the ringgit has weakened against the US dollar to 4.2203 from 4.1940 in May.

 “If the ringgit continues to weaken from current levels, margins for rubber glove manufacturers will no doubt benefit,” it said.

They estimated that under glove manufacturer’s coverage, every 1% depreciation in the ringgit, net profit will increase by 0.3-0.8% in 2019, and vice versa.

For its undemanding valuation and higher-than-industry growth rates, the top picks for the sector are Kossan and Supermax.  “These stocks are currently trading at around their historical averages, hence we believe there is more upside due to their strong earnings growth.”

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