Rubber glove sector to see slowing earnings growth

KUALA LUMPUR: The rubber glove sector in Malaysia is expected to see slowing earnings growth now that the vinyl glove supply from China has recovered, says PublicInvest Research.

The research house maintained its neutral call on the sector as it believes growth has been priced-in at current levels. 

Its price-earnings based target price for Hartalega, Top Glove and Kosssan are RM5.63, RM5.79 and RM4.34 respectively.

PublicInvest noted that Top Glove's recently released 4QFY18 earnings grew at a lower rate of 3% year-on-year and declined 13.6% quarter-on-quarter despite strong revenue growth. 

"This was largely due to higher tax expenses as the tax incentives in FY18 were taken up over the four quarters (vs. FY17 tax incentives that were taken up only in 4QFY17). 

"The Group’s strong revenue growth in FY18 was mainly from developing regions that are mainly natural rubber glove users," it said.

Hartalega's 3Q results are due out later today while Kossan will release its results on Nov 16.

"We expect the glove players’ earnings growth to slow down on the back of the recovery in vinyl glove supply from China," it said.

The research house expects demand-supply normalisation as the glove makers' forward orders are reduced from 60-70 days to 30-45 days. It noted that Hartalega's expansion plans have been significantly slowed.

It added that the government's minimum wage hike to RM1,100 effective Jan 1, 2019, will be minimal as it represents a 1% increase in the total manufacturing costs, which should be offset by the strengthening USD to the ringgit and low material costs.

PublicInvest expects a healthy global demand for gloves at about 8% given its role as an essential item in the healthcare industry.

"We note that there is a risk of overcapacity in the industry, depending on the pace of the glove players commissioning their production lines after the completion of factory construction. 

"That said, the risk should be manageable and mitigated by the slowing down in expansion plans in order to match market demand."