Rubber gloves
Latex is trading below RM7 per kg mainly due to softer demand from tyre manufacturers and traders in China affected by tighter credit. Assuming raw material prices remain low and cost savings are retained (instead of passing them on to customers), we expect glovemakers’ earnings and margins will recover substantially.
We believe they will certainly try to retain as much of the savings as possible, after having absorbed higher raw material costs previously. Our sensitivity analysis shows that every 1% drop in raw material cost could lift earnings by about 3% (assuming all cost savings are retained).
The US dollar has strengthened against the ringgit to 3.15 (+7% from August 2011’s low of 2.97) and this will translate to higher export revenue. Our sensitivity analysis shows that every 1% increase in the greenback against the ringgit could lift earnings by about 5%.
Glovemakers are likely to hedge their US dollar exposures, and given the volatile currency trend this could give rise to wide fluctuations in translation gains or losses upon maturity or marking-to-market.
We remain cautious on the sustainability of current raw material prices. As such, we are maintaining our 2012 latex and nitrile price assumptions (average of RM8.30 per kg for latex and RM5.20 per kg for nitrile) for now. The start of the wintering season from February to May, when latex production is usually lower, coupled with potential pent up demand from car manufacturers could drive up latex and synthetic rubber prices again.
At this juncture, it is still early to impute a strong earnings rebound for Kossan Rubber Industries Bhd and Hartalega Holdings Bhd, while our earnings forecast for Top Glove Corp Bhd is at the higher end of consensus estimates. We like Hartalega (“buy”, target price: RM6.50) for its superior operating margins (27% against 16% industry average) and return on equity (36% against 22% industry average).
We maintain “hold” for Top Glove (TP: RM4.05) and Kossan (TP: RM2.70). The key to margin recovery is sustainability of raw material prices, which could trigger upgrades. — HwangDBS Vickers Research, Dec 20
This article appeared in The Edge Financial Daily, December 21, 2011.
Latex is trading below RM7 per kg mainly due to softer demand from tyre manufacturers and traders in China affected by tighter credit. Assuming raw material prices remain low and cost savings are retained (instead of passing them on to customers), we expect glovemakers’ earnings and margins will recover substantially.
We believe they will certainly try to retain as much of the savings as possible, after having absorbed higher raw material costs previously. Our sensitivity analysis shows that every 1% drop in raw material cost could lift earnings by about 3% (assuming all cost savings are retained).
The US dollar has strengthened against the ringgit to 3.15 (+7% from August 2011’s low of 2.97) and this will translate to higher export revenue. Our sensitivity analysis shows that every 1% increase in the greenback against the ringgit could lift earnings by about 5%.
Glovemakers are likely to hedge their US dollar exposures, and given the volatile currency trend this could give rise to wide fluctuations in translation gains or losses upon maturity or marking-to-market.
We remain cautious on the sustainability of current raw material prices. As such, we are maintaining our 2012 latex and nitrile price assumptions (average of RM8.30 per kg for latex and RM5.20 per kg for nitrile) for now. The start of the wintering season from February to May, when latex production is usually lower, coupled with potential pent up demand from car manufacturers could drive up latex and synthetic rubber prices again.
At this juncture, it is still early to impute a strong earnings rebound for Kossan Rubber Industries Bhd and Hartalega Holdings Bhd, while our earnings forecast for Top Glove Corp Bhd is at the higher end of consensus estimates. We like Hartalega (“buy”, target price: RM6.50) for its superior operating margins (27% against 16% industry average) and return on equity (36% against 22% industry average).
We maintain “hold” for Top Glove (TP: RM4.05) and Kossan (TP: RM2.70). The key to margin recovery is sustainability of raw material prices, which could trigger upgrades. — HwangDBS Vickers Research, Dec 20
This article appeared in The Edge Financial Daily, December 21, 2011.
