Rubber gloves sector
Maintain overweight: Last Friday, the latex price quoted by the Malaysian Rubber Board dropped by a significant 45 sen per kg, or 6.4%, in one day to RM6.56 per kg. This means the price has plunged by RM1.02 per kg, or 13.5%, in a week from Nov 4’s RM7.58 per kg.
The most recent sharp drop was in mid-February to mid-March 2011, during which the latex price retraced sharply by RM2.33 per kg from its high of RM10.90 to RM8.56 per kg in a matter of three weeks. It rebounded to its all-time high of RM10.93 per kg in early-April although it failed to sustain that level.
From then on, the latex price has been on a downtrend, with prices dropping gradually until last week, when we witnessed the very steep drop of RM1.02 per kg.
We believe the longer term downtrend is likely to be sustained, but probably not at the same intensity as the recent retracement. In our opinion, the drop has been too sharp, and based on the recent trend of sharp historical retracement, the latex price tends to rebound strongly within days.
Nevertheless, we maintain our longer term view that it may continue to fall back, probably to the RM6 to RM7 per kg level because: (i) it has not retraced sufficiently since 2009. The price usually peaks in 1H every year, when the wintering of rubber trees sets in and falls back in 2H when supply catches up;
(ii) the strong growth in demand is no longer there as rubber gloves manufacturers are gradually shifting their product mix to nitrile gloves and given the lack of a pandemic; and
(iii) the automotive sector is experiencing a setback in demand amid the global economic slowdown and the operations of many auto manufacturers are being adversely affected by the recent floods in Thailand. Hence, we do not think the latex price will return to its all-time high of RM10.93 per kg.
We see the drop in latex price benefiting Supermax Corp Bhd and Top Glove Corp Bhd on two fronts: (i) the incremental cost being absorbed by them, if any (the balance 30%), would be much lower now compared with previously; and (ii) there will be a boost in sales volume leading to higher earnings in the immediate term (4QCY11) as customers may stock up on the belief that the drop is too steep and is unsustainable.
This is mainly because their product mix comprises 75% natural rubber gloves, the highest among their peers. Hence, both companies will benefit the most following the drop in the price of natural rubber. With the latex price at about RM9 per kg, which we understand made up 65% to 67% of their total cost, the two companies were previously passing on 70% of the higher latex cost to their customers.
We maintain “overweight”. Our top pick remains Supermax (“buy”, fair value: RM5.50). We continue to like the company’s attractive valuation (trading at single digit price earnings ratio of nine times FY2 earnings per share) against Top Glove (“neutral”, FV:RM4), which is trading at 17 times FY2 EPS. Also, we like the fact that the two companies operate in an industry that is resilient against downturns. — OSK Research, Nov 14
This article appeared in The Edge Financial Daily, November 15, 2011.
Maintain overweight: Last Friday, the latex price quoted by the Malaysian Rubber Board dropped by a significant 45 sen per kg, or 6.4%, in one day to RM6.56 per kg. This means the price has plunged by RM1.02 per kg, or 13.5%, in a week from Nov 4’s RM7.58 per kg.
The most recent sharp drop was in mid-February to mid-March 2011, during which the latex price retraced sharply by RM2.33 per kg from its high of RM10.90 to RM8.56 per kg in a matter of three weeks. It rebounded to its all-time high of RM10.93 per kg in early-April although it failed to sustain that level.
From then on, the latex price has been on a downtrend, with prices dropping gradually until last week, when we witnessed the very steep drop of RM1.02 per kg.
We believe the longer term downtrend is likely to be sustained, but probably not at the same intensity as the recent retracement. In our opinion, the drop has been too sharp, and based on the recent trend of sharp historical retracement, the latex price tends to rebound strongly within days.
Nevertheless, we maintain our longer term view that it may continue to fall back, probably to the RM6 to RM7 per kg level because: (i) it has not retraced sufficiently since 2009. The price usually peaks in 1H every year, when the wintering of rubber trees sets in and falls back in 2H when supply catches up;
(ii) the strong growth in demand is no longer there as rubber gloves manufacturers are gradually shifting their product mix to nitrile gloves and given the lack of a pandemic; and
(iii) the automotive sector is experiencing a setback in demand amid the global economic slowdown and the operations of many auto manufacturers are being adversely affected by the recent floods in Thailand. Hence, we do not think the latex price will return to its all-time high of RM10.93 per kg.
We see the drop in latex price benefiting Supermax Corp Bhd and Top Glove Corp Bhd on two fronts: (i) the incremental cost being absorbed by them, if any (the balance 30%), would be much lower now compared with previously; and (ii) there will be a boost in sales volume leading to higher earnings in the immediate term (4QCY11) as customers may stock up on the belief that the drop is too steep and is unsustainable.
This is mainly because their product mix comprises 75% natural rubber gloves, the highest among their peers. Hence, both companies will benefit the most following the drop in the price of natural rubber. With the latex price at about RM9 per kg, which we understand made up 65% to 67% of their total cost, the two companies were previously passing on 70% of the higher latex cost to their customers.
We maintain “overweight”. Our top pick remains Supermax (“buy”, fair value: RM5.50). We continue to like the company’s attractive valuation (trading at single digit price earnings ratio of nine times FY2 earnings per share) against Top Glove (“neutral”, FV:RM4), which is trading at 17 times FY2 EPS. Also, we like the fact that the two companies operate in an industry that is resilient against downturns. — OSK Research, Nov 14
This article appeared in The Edge Financial Daily, November 15, 2011.
