Rubber glove sector to outperform, says Kenanga

  • Business
  • Wednesday, 03 Jul 2019

The lower profits were mainly due to the sharp strengthening of the ringgit in a short timeframe.

KUALA LUMPUR: Concerns about oversupply in the Malaysian glove sector may be overplayed as capacity expansion in the four leading manufacturers is expected to be delayed and staggered.

In its sector outlook, Kenanga research expects share prices in Hartalega, Top Glove, Kossan and Supermax to outperform in subsequent quarters.

"We believe all the negatives could have been priced in with valuations trading at more palatable PERs of between mean and +1.0SD five-year forward average which appears undemanding," said Kenanga.

Among the positives, it said capacity expansion has been slower-than-expected, earnings growth will be boosted by higher average selling prices (ASP) and the ringgit has weakened against the US dollar.

It added that the players are now better at responding to competitive pressures due to previous experience with oversupply while the ASP pressure problem should resolve itself within another quarter.

To recap, the rubber glove sector experienced a mild excess in supply due to its frantic pace of expansion, leading to ASP compression and flattish and lower profits over the past two quarters.

"However, we take comfort that this is nothing more than just a temporary rough patch," it said.

Kenanga's top pick in the sector is Hartalega with a target price of RM5.85 as it stands above its peers in terms of better margins and cost reduction, its innovative product development and booming nitrile gloves segment.

It maintained an outperform call on Kossan with a target price of RM5.25. It noted that the glove maker is trading at a 28% discount to its peers' PER average despite its net profit growth being the highest at 23.7% compared to its peers' average of 12%.
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