KUALA LUMPUR: Maybank KE Research has downgraded the rubber glove sector to Neutral from Overweight, saying price-earnings ratio of glove stocks have been r-rated significantly from 8-16 times to 11-19 times and as such valuations are fairly reflective of fundamentals.
Kossan remains its top pick, with a higher target price of RM7.60, with Hartalega kept on Hold at a target price of RM6.71 and Top Glove downgraded to Hold from Buy at a slightly lower RM6.40 target price.
The research house said most glove companies would not be affected by fluctuations in the currency market, as most of them buy forward contracts to sell the greenback when glove deliveries take place.
It is also of the opinion that although the recent fuel price hike had led to higher transportation costs (+15%), the impact would be insignificant as transportation only account for 2-3% of total costs.
“Overall global glove demand is still growing at a robust rate (Malaysia’s rubber glove exports in 1Q13: +29% year-on-year), underpinned by the persistently strong demand for nitrile and surgical gloves while demand for latex gloves has reached a plateau,” Maybank KE Research said.
“Demand for nitrile gloves continues to grow strongly despite a slightly higher average selling price for nitrile gloves (approximately 8% above that of latex powder-free gloves), for the demand from the developed markets, particularly US, Europe, is less price sensitive,” it added.
According to Maybank KE Research, costs favour nitrile glove sales. On a year-on-year basis, rubber prices have fallen substantially (latex: -18% YTD, NBR: -23%) on rising supply and thin demand.
It pointed out that despite cheaper raw material costs, strong demand has allowed nitrile gloves to be priced at a premium to natural rubber gloves and, as a result, nitrile gloves carry gross margins that are at least 6ppts higher (at an average of about 26%) than that of latex gloves.
However, the research house noted that there was already aggressive expansion from Supermax (not rated by it) which intends to add 6.9 billion pieces to its nitrile glove capacity by 1Q14. It said, already Supermax is undercutting its competitors’ nitrile glove average selling price by around 10%.
Nonetheless, it said it was not unduly concerned.
“Given our estimates of new global nitrile glove demand and also assuming that production lines come on stream in a progressive manner (over a 6-month timeframe), we believe glove players with new capacities may only suppress ASPs initially when new capacity kicks in.
“Meanwhile, incumbent nitrile glove players such as Hartalega (Kossan and Top Glove) will continue to fend off price competition with its operational efficiencies in order to keep its margin intact,” Maybank KE Research concluded.