Rubber Gloves Comments by CIMB Research: The three main concerns that weighed down the rubber glove sector in the middle of 2008 have turned in favour of glovemakers. After hitting a high of RM7.20 per kg in July 2008, the latex price has more than halved to a low of RM3.15.
·Within a period of three months, the greenback has strengthened by 13% against the ringgit to a high of RM3.64/US$1 before falling back to RM3.46/US$1 currently. Based on our house forecasts, the ringgit will end 2009 at RM3.68/US$1.
·Since natural gas prices were raised by 72% to RM22 per mmbtu on Aug 1, most glovemakers have managed to raise average selling prices to offset the higher costs. The Government plans to continue lowering its subsidy on natural gas but it will be staggered over 15 years, giving the manufacturers plenty of time to look for other alternative energy sources and reduce their dependence on a single source of energy.
·Demand to remain resilient.
The economic slowdown has stirred concerns over the demand for rubber gloves. While it is true that demand for industrial gloves and, to a certain extent, cleanroom gloves will be affected, we believe that the demand for examination and medical-grade gloves will remain resilient.
This is because gloves are crucial to the healthcare and food industries, especially in the developed countries.
Recommendation: Local glovemakers have demonstrated their ability to prevail even in the most challenging environment of gas price hikes, rising raw material costs and weak US dollar.
They have been able to pass on 70%-80% of the cost increases to their customers without severely affecting demand.
Furthermore, the tide is turning in favour of the glovemakers as latex prices have come off sharply and the US dollar has strengthened somewhat. Given the commendable earnings growth of 15%-20% and the recession-proof nature of the product, we reiterate our OVERWEIGHT stance on the sector.
·Kossan Rubber Industries Bhd remains our top pick for its niche product, i.e. high-end medical gloves. Among the top three largest manufacturers, Kossan is the smallest in terms of capacity. Hence, it would also be the least affected by the deterioration of the economic outlook.
There is no change to our earnings forecast. However, given the stable demand outlook and the reversal of the US dollar and latex prices, we are reducing Kossan’s discount to our revised target market P/E to 30% (from 40% previously).
This raises our target price from RM3.60 to RM4.70. Rerating catalysts include sustainable margins and improving quarterly earnings stemming from its ongoing expansion.
Tenaga Nasional Bhd (RM6.35 as at Jan 8) IT was reported that the Government was looking at renegotiating specific areas of the Power Purchase Agreements (PPA) to relieve Tenaga Nasional (TNB) of the financial strain of overcapacity payments. The Government intends to begin renegotiating with the independent power producers (IPPs) this year.
Comments by OSK Research: Another round of talks? While it’s not surprising that there continues to be news flow on the PPA renegotiations, we are as we had been before, not too hopeful of a resolution this time around after the many previously failed rounds of talks.
With the windfall tax only applicable for one year and the IPPs having scored a victory on that, we feel that there will be less pressure on them to renegotiate the PPAs unless there is an extension of the PPAs in tandem with secured gas supply from Petronas.
Any renegotiations will again give rise to the issue of the potential impact on the IPP bonds in Malaysia.
Many areas can be discussed. If indeed any renegotiations are to take place, we feel that it will not be on the capacity tariffs but rather on efficiency measures such as the Availability Threshold. This is the availability measure whereby IPPs will receive capacity payments only if their power plants are available (not down for maintenance or other issues) over and above this threshold.
For first generation IPPs, the availability threshold ranges from 85%-87% (except YTL Power where the PPA is structured differently) compared with 3rd generation IPPs where the threshold is higher at 91%.
This means that 3rd generation IPPs have to ensure that their plants are capable of generating power more frequently than 1st generation IPPs, thus ensuring that a capacity payment really is deserved.
Recommendation: Not holding our breath for now. Given the lack of details, our forecasts are unchanged for both MMC and TNB and so is our BUY call on TNB with fair value of RM9.15. The indicative date of the release of the company’s results release is Jan 19 and we are not positive on the 1Q09 results given the still high coal prices during the quarter but are more hopeful of its future results going forward.
QL Resources Bhd (RM2.40 as at Jan 8) Comment by Kenanga Research: The sharp decline in the price of commodities will negatively impact QL’s top line in FY2009 and FY2010. However, profit margins are largely intact, with some compression expected in the marine segment.
In the marine products manufacturing (MPM) division, the price of fish meal declined by 20% in November 2008 from the FY2009 peak of US$1,232/tonne in July 2008, in line with the trend for other protein meals.
The price of surimi has also come off by about 29% in November (from RM8,500/tonne in April 2008) due to lower demand from the major markets of Japan and South Korea.
In the palm oil activities (POA) segment, CPO price continued to decrease in November taking the cue from crude oil price although the impact on QL’s earnings is minimal given that only 3% of QL’s first half of FY2009 pre-tax profit came from POA.
The integrated livestock farming (ILF) division’s revenue will be affected by the downward price trend of feed commodities (maize and soybean meal), although the pre-tax profit margin for feed meal trading is expected to remain stable at 3%-4% as QL’s cost-plus pricing enables it to pass on costs to customers.
We are lowering our FY2009 net profit estimate by 4% to RM92.3mil and FY2010 by 12% to RM102.4mil in response to the sharp decline in commodities prices. We have lowered our MPM expectations to a 2% increase in fish meal price in FY2009 and a 13% decrease in surimi price in FY2009.
Our CPO price assumptions remain unchanged at RM2,800/tonne in FY2009 and RM1,800/tonne in FY2010.
For ILF, we are adjusting our growth assumptions for maize and soybean meal prices in FY2009 and FY2010 to 23% and 20% (from 30% and 37% previously).
Recommendation: Reiterate BUY recommendation but lowering target price to RM3.10 from RM3.60, due to rolling over to FY2010 PER of 10x applied to adjusted EPS of 31 sen.
QL is one of our top consumer picks for its resilient, agriculture-based business and well-established track record. Added plus is gross dividend yield of 3.9% in FY2009 and 4.3% in FY2010.
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