KUALA LUMPUR: Recent earnings results show that companies in the rubber glove sector are not at significant risk of lower margins from rising production costs, says Affin Hwang Capital research.
The research house maintained its overweight call on the sector with Kossan
and Supermax as its top picks.
It kept its buy call on Top Glove despite cuttings its earnings forecast and has a sell call on Hartalega
due to its rich valuation and forecast lower growth rate.
In 1Q19, sector earnings contracted 4.3% but still came broadly in line or about 22% of Affin Hwang's and consensus full-year forecasts.
The research house said the profit decline was due mainly to a 22% year-on-year decline in profits in Hartalega due to its margins being negatively impacted by the volatility in the ringgit.
Kossan, however, delivered profit growth of 32% y-o-y during the quarter.
Affin Hwang expects overcapacity concerns to ease as its recent channel checks suggest that lead times have normalised to about 45 days from the 30 days earlier this year.
"We have, however, revised lower our capacity growth forecast for 2019 to 13% from 10%, as some manufacturers have partially delayed their targeted expansion plans for
the year," it said.
It added that the weakening of the ringgit versus the US dollar from 4.06 to 4.19 in the past two months will have a positive effect on rubber manufacturers' margins to the lagging effect of their pricing.
"Based on our estimates, for every 1% change in the RM/US$, the impact to the bottom line is around 0.3-0.5%," said Affin Hwang.
Meanwhile, raw material prices are also on the downtrend with nitrile prices trending lower to US$1,050/,t from US$1,145/mt since the start of the year.