The future of gloves


  • Business
  • Monday, 26 Nov 2007

FOR a setting of share price direction when there are uncertainties in an industry, the rubber glove sector provides an insight.  

Top Glove Corp Bhd, for instance, has seen a 40% drop in its share price this year even though its latest quarterly results showed a 33% rise in pre-tax profit.  

Supermax Corp Bhd, a smaller glove manufacturer, announced on Wednesday the earnings in its latest quarter rose 27%. Its share price went up by all of 1 sen the next day.  

Similarly, Kossan Rubber Industries Bhd's share price has declined by RM1.00 from the start of the year, when its price was RM4.80, to RM3.80 on Friday.  

Plantations that have sold forward have to wait for the next harvest toreap the current high prices

The glove companies produce a humdrum product but their shares were anything but boring in previous years. They delivered high earnings growth and saw a steady rise in their share prices.  

The under-performance of the glove stocks is due to several factors, such as concerns over the price of liquefied petroleum gas (LPG) for which an increase is widely expected next year.  

Tenaga Nasional Bhd, the biggest user of LPG, pays RM6.40 per mmbtu (one million British thermal units), while other companies in the industrial sector pay about RM12.90 per mmbtu. The international price is about RM24.00. 

It is of even greater concern to investors that Gas Malaysia Sdn Bhd, an associate company of Petronas, is believed to be reluctant to increase the supply of LPG to manufacturers, as it is not profitable to do so. 

That would restrain glove makers from expanding their capacities, as most of them currently use LPG to heat their industrial processes.  

Industry players said, however, they had contracted for additional LPG supplies for their expansion into 2008 or even 2009. Supply should not, therefore, be a problem in the short term.  

As for higher LPG prices, if that is raised too much, the glove makers are prepared to switch to biomass or coal. That would ensure that LPG supply would not be a constraining factor in their expansion plans from 2009 or beyond.  

Investors are also worried over a perception that earnings growth will be slower in future. Disproving that, the results of Supermax were quite good.  

While Top Glove's earnings growth was still quite strong, some fund managers were surprised it was achieved in spite of no increase in revenue, which stood at RM307.7mil in Q4/07 compared with RM307.6mil in the same quarter last year.  

It is understood there was no revenue increase in Q4/07 because latex prices were lower during that period compared with Q4/06. That accounted for the expansion of profit margins in its Q4/07 period.  

While the downdraft of share prices is painful for shareholders, it has given other investors an opportunity to get into the glove stocks at inexpensive, current year price/earnings (PE) valuations of mid-teens for Top Glove and just under 10 times for Kossan and Supermax for companies growing at over 20% a year.  

 

Non-events  

 

It is not only Supermax that produced higher earnings without being rewarded with a higher share price.  

Many other companies in the small to mid-cap space delivered strong earnings growth while their share prices languished.  

This was partly due to a macro view of uncertainties that the US could slip into a recession early next year, and if the Chinese stock markets would continue in their steep correction.  

Companies here that did well include Sino Hua-an International Bhd, a manufacturer of coke for the iron and steel sector in China. It reported a 46% rise in net profit in its latest quarter, and its share price remained unchanged at 79 sen at the end of the week, down 39% from RM1.30 at the start of the year. It's also unusual for a stock that is largely doing business in China to be trading at a PE of less than six times.  

 

Fast forward 

 

As crude palm oil (CPO) prices on the three-month contract closed at a record RM3,044 a tonne on Friday, this is a price no one expected at the start of the year, not even the planters. Many plantation companies sold forward their output, as a result of which there was a lag effect before their earnings reflected the high CPO prices.  

One of the companies that sold its output far forward is Tradewinds Plantation Bhd. Hence, its results in earlier quarters were disappointing, but in its latest quarter, its earnings finally showed profits befitting a company with large acreages.  

It reported a net profit of RM44.6mil for its third quarter ended Sept 30, 2007, compared with RM9.1mil in the same quarter last year. 

Tradewinds did not indicate its average selling price but analysts had reported its forward contracts expired and it would start to benefit from high CPO prices.  

Even IOI Corp Bhd, the best and the brightest, has sold forward half its output at RM2,500 a tonne for its financial year ending June 30, 2008. While it locked in prices for half its output, it also means it still has the half to sell at current prices.  

United Plantations Bhd, a veteran planter, reported on Monday that its net profit rose just 13.5% to RM56.7mil in its Q3 while earnings for the first nine months this year were flat at RM108mil compared with the same period last year.  

The company said it sold substantial quantities of CPO forward last year under its forward sales policy.  

In contrast, Asiatic Development Bhd said on Thursday its Q3 earnings were 134% higher at RM101.8mil. It achieved a net profit of RM223mil for the first nine months this year, obtaining an average price of RM2,343 a tonne during that period. The price suggests it benefited from little in the way of forward sales. 

 TOPGLOV :  [Stock Watch]  [NewsSUPERMX :  [Stock Watch]  [NewsKOSSAN :  [Stock Watch]  [NewsTENAGA :  [Stock Watch]  [NewsHUAAN :  [Stock Watch]  [NewsTW76cGST :  [Stock Watch]  [NewsIOICORP :  [Stock Watch]  [NewsUTDPLT :  [Stock Watch]  [NewsASIATIC :  [Stock Watch]  [News]

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