KUALA LUMPUR: CIMB Equities Research continues to be bullish on the rubber glove sector based on its increasingly attractive risk-reward profile and improving sector fundamentals.
It said on Wednesday the recent strengthening of US$/RM a boon to Malaysian glove players.
“Demand and supply dynamics have improved, further aided by the spacing out/ staggering of new capacity ramp-up over the year.
“Glove selling prices to trend higher given the easing of capacity. This will enable better past-through of costs, including rising raw material prices.
“Maintain sector Overweight, with Top Glove as our top pick. We also upgrade Kossan to Add, and Hartalega
to Hold,” it said.
CIMB Research said that post-US elections, the ringgit took a turn for the worse and significantly underperformed most of the regional currencies.
Note that currency gains from abrupt downside swings in RM/US$ benefit glove makers as they would be able to arbitrage on the unhedged portion of their sales proceeds.
As a result, given the 7.3% appreciation in US$/RM since end-3Q16, the research house thinks glove manufacturers could post higher sequential numbers as they benefit from the weaker RM.
“Moving into 2017, we expect the combined capacity of glove players under our coverage to increase 11.1% to 129 billion pieces per annum,” it said.
While headline numbers exhibit an aggressive capacity build-up over in 2017, the research house note that manufacturers will stagger the ramp up in capacity instead to prevent a supply glut which would in turn cause a prolonged pricing competition.
This should allow for better absorption of the new incoming supply against inelastic global demand growth of 7%-9% a year.
“In tandem with the expectations of better supply-demand dynamics, we believe glove average selling prices (ASPs) will trend higher in 2017 as glove makers will need to pass on the bulk, if not all of the increase in latex raw material prices.
“ASPs have already begun its positive momentum and picked up in 3Q16. Nonetheless, we think selling prices will remain competitive given Malaysia's better operating and cost efficiencies as it maintains its leadership position in the global glove market.
“Even though the recent increase in latex prices (+18.2% YTD) could spark some concern, we do not foresee any difficulties in the glove players passing on the additional costs,” it pointed out.
CIMB Research also noted that the recent cost spike was mainly due to one-off external causes and believe latex prices should correct by mid-2Q17.
Thus, it expects both latex and nitrile prices to trend lower after the end of winter in the Northern Hemisphere as both these materials are considered direct substitutes of each other and highly correlated.
“We believe the worst is over for the sector as its risk-reward profile has improved amid a favourable operating environment. Given this and the sustained US$ strength, we think Malaysian glove makers are poised to record stronger sequential earnings ahead.
“Thus, we maintain our Overweight call on the sector and Top Glove as our top pick. We also upgrade Kossan from Hold to Add given its recent share price correction and improved outlook, and Hartalega from Reduce to Hold in view of an easing pricing competition,” it said.
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