Rubber gloves
Maintain overweight: Average latex price in 3QCY11 fell by 10.3% quarter-on-quarter (q-o-q), while the US dollar exchange rate remained relatively steady (+0.3% q-o-q). Top Glove Corp Bhd, Supermax Corp Bhd and Kossan Rubber Indistries Bhd were the main beneficiaries of the latex price decline.
Aggregate core net profit for 3QCY11 for the three companies rose by 10.2% q-o-q, bolstered mainly by core net profit growth of 12.9% q-o-q for Kossan and 16% q-o-q for Supermax. Net profit growth for Top Glove was weaker at 1.9% q-o-q. This did mark Top Glove’s third consecutive quarter of sequential growth.
More importantly, 3QCY11 saw a significant improvement in operating margins as the 10.2% q-o-q bottom line growth was only partially derived from the 4.1% q-o-q increase in revenue. Supermax’s 3QCY11 earnings before interest and tax (Ebit) margin expanded by three percentage points (ppt) (2QCY11: 8%, 3QCY11: 11%), Kossan added 1.5ppt (2QCY11: 10.3%, 3QCY11: 11.8%), and Top Glove’s 3QCY11 Ebit margin held steady at 6.4%.
There were two key reasons for the stronger margins: (i) lower latex costs, and; (ii) increased demand and production of higher margin nitrile gloves. Although nitrile latex prices have increased by more than 50% year-to-date (YTD), margins for synthetic gloves are still higher than natural rubber (NR) gloves (15% to 20% against 10% to 15% for NR gloves). Thus, the higher production of nitrile gloves aids in supporting overall margins.
Hartalega Sdn Bhd’s 2QFY12 Ebit margin slipped to 29.9% from 32.4% in 1QFY12, attributed to: (i) higher nitrile latex costs, and; (ii) increased pricing pressure, which limits Hartalega’s ability to fully pass on the incremental increase in raw material costs. That said, demand for gloves sold was steady (+1.1% q-o-q), leading to a 4.6% q-o-q increase in revenue. 2QFY12 core net profit of RM54.8 million was well within our expectations.
We maintain our “overweight” stance on the rubber gloves sector. Our view is premised on: (i) low demand risk. Although preference for type of gloves may change, overall global demand growth for medical gloves remains strong; (ii) an inherently defensive sector in a risk-averse environment. Given low demand risk, the rubber glove sector makes an attractive choice for investors during periods of weak global sentiment and economic uncertainty; (iii) improved earnings visibility. With 4QCY11 average latex price hovering at RM7.47 per kg currently (representing a q-o-q decline of 14%), we expect sequential earnings growth and margin improvement to continue; and (iv) attractive valuations.
Excluding Top Glove (which historically trades at a premium), glove manufacturers are still trading at single digit CY12 price earnings ratios, despite the recent run-up in share prices. With stronger sequential earnings growth and improved investor sentiment on the sector, we believe glove stocks could trade at up to +1 standard deviation above historical means.
We maintain our “buy” recommendations for Kossan (target price: RM4.04), Supermax (TP: RM4.36) and Hartalega (TP: RM7.33). Top Glove remains a “neutral”, with a TP of RM4.82. Top picks are Kossan and Supermax for better earnings visibility and attractive valuations. — Affin Research, Dec 7
This article appeared in The Edge Financial Daily, December 8, 2011.
Maintain overweight: Average latex price in 3QCY11 fell by 10.3% quarter-on-quarter (q-o-q), while the US dollar exchange rate remained relatively steady (+0.3% q-o-q). Top Glove Corp Bhd, Supermax Corp Bhd and Kossan Rubber Indistries Bhd were the main beneficiaries of the latex price decline.
Aggregate core net profit for 3QCY11 for the three companies rose by 10.2% q-o-q, bolstered mainly by core net profit growth of 12.9% q-o-q for Kossan and 16% q-o-q for Supermax. Net profit growth for Top Glove was weaker at 1.9% q-o-q. This did mark Top Glove’s third consecutive quarter of sequential growth.
More importantly, 3QCY11 saw a significant improvement in operating margins as the 10.2% q-o-q bottom line growth was only partially derived from the 4.1% q-o-q increase in revenue. Supermax’s 3QCY11 earnings before interest and tax (Ebit) margin expanded by three percentage points (ppt) (2QCY11: 8%, 3QCY11: 11%), Kossan added 1.5ppt (2QCY11: 10.3%, 3QCY11: 11.8%), and Top Glove’s 3QCY11 Ebit margin held steady at 6.4%.
There were two key reasons for the stronger margins: (i) lower latex costs, and; (ii) increased demand and production of higher margin nitrile gloves. Although nitrile latex prices have increased by more than 50% year-to-date (YTD), margins for synthetic gloves are still higher than natural rubber (NR) gloves (15% to 20% against 10% to 15% for NR gloves). Thus, the higher production of nitrile gloves aids in supporting overall margins.
Hartalega Sdn Bhd’s 2QFY12 Ebit margin slipped to 29.9% from 32.4% in 1QFY12, attributed to: (i) higher nitrile latex costs, and; (ii) increased pricing pressure, which limits Hartalega’s ability to fully pass on the incremental increase in raw material costs. That said, demand for gloves sold was steady (+1.1% q-o-q), leading to a 4.6% q-o-q increase in revenue. 2QFY12 core net profit of RM54.8 million was well within our expectations.
We maintain our “overweight” stance on the rubber gloves sector. Our view is premised on: (i) low demand risk. Although preference for type of gloves may change, overall global demand growth for medical gloves remains strong; (ii) an inherently defensive sector in a risk-averse environment. Given low demand risk, the rubber glove sector makes an attractive choice for investors during periods of weak global sentiment and economic uncertainty; (iii) improved earnings visibility. With 4QCY11 average latex price hovering at RM7.47 per kg currently (representing a q-o-q decline of 14%), we expect sequential earnings growth and margin improvement to continue; and (iv) attractive valuations.
Excluding Top Glove (which historically trades at a premium), glove manufacturers are still trading at single digit CY12 price earnings ratios, despite the recent run-up in share prices. With stronger sequential earnings growth and improved investor sentiment on the sector, we believe glove stocks could trade at up to +1 standard deviation above historical means.
We maintain our “buy” recommendations for Kossan (target price: RM4.04), Supermax (TP: RM4.36) and Hartalega (TP: RM7.33). Top Glove remains a “neutral”, with a TP of RM4.82. Top picks are Kossan and Supermax for better earnings visibility and attractive valuations. — Affin Research, Dec 7
This article appeared in The Edge Financial Daily, December 8, 2011.
