KUALA LUMPUR: CIMB Equities Research is retaining its overweight call on the Malaysian glove makers with Kossan Rubber Industries
as its sole Add call.
It said on Wednesday although a spike in average selling prices (ASPs) may dampen demand in the near term, the underlying robust demand for gloves will likely maintain sector attractiveness in the long term.
Downside risks to its view are a sharper-than-expected spike in raw material prices and sharp weakening of the US dollar to the ringgit.
On Tuesday, StarBiz reported that Malaysian Rubber Glove Manufacturers Association (MARGMA) expects ASPs prices of rubber gloves are set to increase.
MARGMA highlighted that depending on glove type, the quantum of increase should be in the 9%-12% range. The association encouraged its members to increase their ASPs to reflect higher overall production costs.
The increase in glove ASPs is to pass on a likely spike in raw material prices.
For nitrile butadiene (NBR) gloves, the recent Hurricane Irma has affected the production of various butadiene manufacturing facilities in the affected areas. This is set to lead to higher latex butadiene prices.
Latex-based gloves ASPs are also likely to be adjusted upwards given the recent increase in latex prices.
Furthermore, MARGMA also highlighted that prices of latex tend to increase heading closer towards the International Tripartite Rubber Council’s (comprising the world’s top natural rubber producing countries) annual meeting which will take place this Friday due to anticipation of price fixing and speculation.
MARGMA highlighted that the ASP increases also reflect the recent weakening of US$/ringgit.
Glove makers previously shared cost savings from currency gains with their customers by lowering their ASPs.
The US$/ringgit has declined 5.4% to RM4.21 from a peak of RM4.45 in March 2017. Glove makers are unlikely to maintain their margins at these currency levels, unless they increase their selling prices to reflect the new forex rate.
“However, we expect glove demand to remain robust in 2H17. MARGMA highlighted that 2H17’s volume growth is set to outperform 1H17’s.
“This is in tandem with the consistently strong demand from Europe and the Americas, as well as increased demand from Asian markets.
“Various glove makers have highlighted that they are currently in an oversold position, with their capacity fully taken-up by customers till end-Dec 2017,” said CIMB Research.
CIMB Research has a Hold for Hartalega with a target price of RM7.06 versus it closing price RM6.70.
Hartalega is the largest nitrile glove manufacturer in the world by production capacity. Current product mix stands at 90 NBR: 10 NR (natural rubber).
“In our view, it is the leader in nitrile glove manufacturing technology, with the highest margins in the sector as of 2016,” it said.
As for Kossan, CIMB Research has a target price of RM7.55 versus the last traded price of RM6.82.
Kossan plans to increase its production capacity from 22 billion gloves per annum to 44 billion by 2022.
“We expect higher margins due to improving operating efficiency via increased automation and a better product mix,” it said.
As for Top Glove, CIMB Research has a Hold recommendation and target price of RM5.75 versus the last close of RM5.40.
Top Glove is the world’s largest glove manufacturer with production capacity of 48 billion pieces per annum at end-2016.
“It intends to increase its capacity by 24% to 59.7 billion pieces per annum by end-Dec 2018. It aims to increase its global market share from 30% in 2016 to 20% by 2020,” said the research house.
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