KUALA LUMPUR: The tug of war between nitrile and latex glove makers has now tilted in favour of the former, following Thailand’s intervention moves to raise rubber prices early last week.
The intervention by Thailand, the world’s largest rubber producer, has arrested the decline in the rubber price and lifted it from recent lows.
On the other hand, nitrile prices have headed south despite high crude oil prices as the performance of the two has started to diverge.
Hartalega Holdings Bhd is the biggest beneficiary of this latest development. Its share price rose to a record high of RM6.90 last Friday as investors expect the glove maker to benefit from lower nitrile prices.
According to CIMB Research, the cash cost for producing nitrile gloves is 20% lower than rubber gloves, as natural rubber prices have risen 17% since Thailand approved measures to boost the price on Jan 24.
As such, the research house anticipates demand to shift from natural rubber to nitrile gloves.
“The widening cost difference between nitrile and natural rubber is positive for Hartalega as its superior affordability will underpin demand for nitrile gloves. This will enable Hartalega to grab market share from natural rubber glovemakers as reduced healthcare budgets in Europe encourage hospitals to search for cheaper alternatives,” CIMB Research said in a note last Friday.
Compared with its peers that manufacture more natural rubber gloves, Hartalega produces 80% of nitrile gloves in its product mix.
The research house said nitrile prices have fallen 35% since last August to stabilise between US$1,500 (RM4,560) and US$1,600 per tonne currently.
“More significantly, nitrile prices have begun to diverge with Brent crude, as the latter has fallen by 15% to US$110 per barrel since mid-2011. We believe that the divergence is the result of the tug of war between weakening oil demand growth (lower prices) and supply risks due to geopolitical uncertainty (higher prices),” said CIMB Research.
In the past, analysts noted there was a strong correlation between nitrile and Brent crude oil price movements.
At the same time, natural rubber prices fell from a record high of RM10.60 per kg last February to around RM6 per kg earlier this month. Since Thailand gave the green light to increase its locally grown natural rubber price to 120 baht (RM11.75) per kg, natural rubber price has increased to RM7.43 per kg.
This is in contrary to earlier views by Top Glove Corp Bhd, Supermax Corp Bhd and estimates by other analysts, who were bearish on rubber prices before the Thai government’s intervention.
Earlier this year, Top Glove and Supermax forecast that natural rubber prices would fall to between RM5.50 and RM6 per kg in the first quarter of 2012.
Analysts also held similar views then as natural rubber prices were expected to fall due to the rubber glut and weakening demand.
Supermax then expected the lower natural rubber price and stronger US dollar to boost its sales by 20% for FY12 ending Dec 31, while Top Glove was looking to increase profits by 30%.
This optimism boosted the share prices of both counters earlier this year.
Supermax and Top Glove rose 30.3% and 26.2% in the last three months to their respective year highs of RM2.32 and RM5.25, but have since pared some of their gains to close at RM2.15 and RM5.05 respectively last Friday.
AmResearch upgraded the sector outlook to “overweight” and upgraded Top Glove and Kossan Rubber Industries Bhd to “buy” with fair values of RM6.15 and RM4.31 respectively.
However, it remains to be seen if these stocks would be re-rated soon as the price control measure by the Thai government has pushed up natural rubber prices.
CIMB Research has an “underperform” on Top Glove with a fair value of RM3.61 and advised investors to accumulate Hartalega shares instead. It has an “outperform” call on Hartalega with a target price of RM8.44.
“While Hartalega’s liquidity is still low compared with Top Glove, it is up 35% since our conference in January. Its major shareholder has indicated a willingness to further improve liquidity via a bonus issue and/or a measured selldown of its majority stake,” CIMB said.
According to Bloomberg data, Hartalega has 11 “buy” and one “hold” calls with a consensus fair value of RM6.98. Supermax has six “buy”, five “neutral” and two “sell” calls with a consensus fair value of RM2.00.
Top Glove has only one “buy”, three “neutral” and four “sell” calls with a consensus fair value of RM3.58, while Kossan has 13 “buy” and four “neutral” recommendations with a consensus fair value of RM3.58.
Hartalega gained RM1.36 or 24.5% in the past three months to close at RM6.90 last Friday. Kossan rose 29.4% in the same period to a high of RM3.65 on Jan 13, before paring down to RM3.47.
This article appeared in The Edge Financial Daily, January 30, 2012.
The intervention by Thailand, the world’s largest rubber producer, has arrested the decline in the rubber price and lifted it from recent lows.
On the other hand, nitrile prices have headed south despite high crude oil prices as the performance of the two has started to diverge.
Hartalega Holdings Bhd is the biggest beneficiary of this latest development. Its share price rose to a record high of RM6.90 last Friday as investors expect the glove maker to benefit from lower nitrile prices.
According to CIMB Research, the cash cost for producing nitrile gloves is 20% lower than rubber gloves, as natural rubber prices have risen 17% since Thailand approved measures to boost the price on Jan 24.
As such, the research house anticipates demand to shift from natural rubber to nitrile gloves.
“The widening cost difference between nitrile and natural rubber is positive for Hartalega as its superior affordability will underpin demand for nitrile gloves. This will enable Hartalega to grab market share from natural rubber glovemakers as reduced healthcare budgets in Europe encourage hospitals to search for cheaper alternatives,” CIMB Research said in a note last Friday.
Compared with its peers that manufacture more natural rubber gloves, Hartalega produces 80% of nitrile gloves in its product mix.
The research house said nitrile prices have fallen 35% since last August to stabilise between US$1,500 (RM4,560) and US$1,600 per tonne currently.
“More significantly, nitrile prices have begun to diverge with Brent crude, as the latter has fallen by 15% to US$110 per barrel since mid-2011. We believe that the divergence is the result of the tug of war between weakening oil demand growth (lower prices) and supply risks due to geopolitical uncertainty (higher prices),” said CIMB Research.
In the past, analysts noted there was a strong correlation between nitrile and Brent crude oil price movements.
At the same time, natural rubber prices fell from a record high of RM10.60 per kg last February to around RM6 per kg earlier this month. Since Thailand gave the green light to increase its locally grown natural rubber price to 120 baht (RM11.75) per kg, natural rubber price has increased to RM7.43 per kg.
This is in contrary to earlier views by Top Glove Corp Bhd, Supermax Corp Bhd and estimates by other analysts, who were bearish on rubber prices before the Thai government’s intervention.
Earlier this year, Top Glove and Supermax forecast that natural rubber prices would fall to between RM5.50 and RM6 per kg in the first quarter of 2012.
Analysts also held similar views then as natural rubber prices were expected to fall due to the rubber glut and weakening demand.
Supermax then expected the lower natural rubber price and stronger US dollar to boost its sales by 20% for FY12 ending Dec 31, while Top Glove was looking to increase profits by 30%.
This optimism boosted the share prices of both counters earlier this year.
Supermax and Top Glove rose 30.3% and 26.2% in the last three months to their respective year highs of RM2.32 and RM5.25, but have since pared some of their gains to close at RM2.15 and RM5.05 respectively last Friday.
AmResearch upgraded the sector outlook to “overweight” and upgraded Top Glove and Kossan Rubber Industries Bhd to “buy” with fair values of RM6.15 and RM4.31 respectively.
However, it remains to be seen if these stocks would be re-rated soon as the price control measure by the Thai government has pushed up natural rubber prices.
CIMB Research has an “underperform” on Top Glove with a fair value of RM3.61 and advised investors to accumulate Hartalega shares instead. It has an “outperform” call on Hartalega with a target price of RM8.44.
“While Hartalega’s liquidity is still low compared with Top Glove, it is up 35% since our conference in January. Its major shareholder has indicated a willingness to further improve liquidity via a bonus issue and/or a measured selldown of its majority stake,” CIMB said.
According to Bloomberg data, Hartalega has 11 “buy” and one “hold” calls with a consensus fair value of RM6.98. Supermax has six “buy”, five “neutral” and two “sell” calls with a consensus fair value of RM2.00.
Top Glove has only one “buy”, three “neutral” and four “sell” calls with a consensus fair value of RM3.58, while Kossan has 13 “buy” and four “neutral” recommendations with a consensus fair value of RM3.58.
Hartalega gained RM1.36 or 24.5% in the past three months to close at RM6.90 last Friday. Kossan rose 29.4% in the same period to a high of RM3.65 on Jan 13, before paring down to RM3.47.
This article appeared in The Edge Financial Daily, January 30, 2012.
