Interest in rubber glove stocks a knee-jerk reaction

  • Business
  • Friday, 12 Apr 2013

PETALING JAYA: Over the past 10 days, rubber glove stocks have surged by 5%-13% to their 52-week high, as investors bought in anticipation of a surge in demand for rubber gloves.

Analysts, however, believe that the lack of fundamental catalysts might cap the uptrend.

Since the outbreak of the avian flu virus H7N9, the market has been expecting rubber glove companies to outperform, as in the case of the severe acute respiratory syndrome or H1N1 outbreak.

However, the H7N9 outbreak has not shown signs of becoming a pandemic, and analysts are now indicating that the heavy trading in rubber glove counters was only speculative or a knee-jerk reaction.

Hong Leong Investment Bank head of research Low Yee Huap said he believed that there were limited fundamental catalysts to continue the share price rally. “Until we see further H7N9 deterioration and turning into a pandemic, we are maintaining our neutral' stance,” he said in a note.

He said during the H1N1 incident, earnings of rubber glove manufacturers were greatly enhanced only under the confluence of several catalysts, including a plunge in raw material prices, the strengthening of the US dollar against the ringgit and a shortage in supply due to capacity underinvestment.

Considering that there has not been more than one catalyst in play at the moment, Low believes that the sector does not qualify for a re-rating yet.

He said he did not expect rubber glove players to enjoy higher profitability due to foreign exchange as in 2009 during the H1N1 outbreak, as several fundamental shifts have occurred, which would cap the performance of the ringgit against the US dollar at between 3.05 and 3.10.

“For one, trade surplus will be shrinking going forward due to higher import for construction and oil and gas projects. Bank Negara reserves are also tapering off and we expect this trend to continue. The high level of foreign shareholding of debt securities also represents vulnerability for the ringgit.”

Furthermore, Low said he did not foresee any shortage of supply on the back of heavy capital expenditure on capacity expansion, unlike during the H1N1 outbreak. “We are rather concerned on the likelihood of a rubber glove glut if demand growth falls below 10%, causing the average selling price to plunge.”

CIMB analyst Yeoh Yung-Juen maintained an “overweight” on the sector, taking into account the strong demand and gas supply as catalysts, rather than the H7N9 endemic.

“While H7N9 and H1N1 in 2009 have been linked, we think the analogy is unfair, as H1N1 was declared a pandemic by the World Health Organisation, forcing hospitals to stock up on medical supplies, including gloves. (But) no such directive has been given for H7N9,” he pointed out.

Yeoh noted that H1N1 surfaced first in the United States, where there was already a high demand and a mature market for gloves. However, China, being a greenfield market, has a low glove consumption, and hence glove makers may not benefit like they had in 2009.

Affin Research analyst Mandy Teh remained “overweight” on the sector as well. Aside from the potentially higher orders, Teh noted that latex prices remained low and stable, which was good for the sector.

She said the sector's key growth driver, latex price, which made up 55% to 60% of glove manufacturers' production cost, was still low. “We attribute this to the weak global economic sentiment and potential supply glut of latex from Vietnam and Cambodia.

“Should the H7N9 outbreak worsen, this would drive latex costs higher, which would be easily passed on to customers,” she added. Affin's top pick was Supermax Corp Bhd for its undemanding valuations at 7.7 times. CIMB picked Hartalega Holdings Bhd due to its higher margins, returns and growth potential.

CIMB Research's Yeoh added that Top Glove Corp Bhd stood to benefit the most, as it sells vinyl gloves, which are popular in China. At yesterday's close, only Top Glove closed higher, one sen up to RM5.90.

Supermax Corp closed one sen down to RM2.03 and Kossan Rubber Industries ended the day four sen lower to RM3.76. Hartalega Holdings, meanwhile, closed unchanged at RM5.20.

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