Rubber glove sector
Maintain neutral: Earlier last month, we upgraded our recommendation for Top Glove Corp Bhd to “market perform” from “underperform” following two key developments.
First, latex prices had eased considerably and Top Glove’s management guided for latex prices to stabilise at around RM6 per kg over the next three to six months. Second, exchange rate movements have been favourable to glove manufacturers. These prompted us to lower our latex price assumptions by 5% to 5.5% to RM7.20 to 7.60 per kg while we raised our ringgit to US dollar assumptions for Top Glove to RM2.90 to RM3 per dollar from RM2.80 to RM2.90.
Following these changes, we are bringing our assumptions for the other glove manufacturers in line with our assumptions for Top Glove.
Since hitting a year-low of RM6.30 per kg on Jan 10, latex prices have since rebounded to around RM7.50 per kg currently. We believe the spike in latex prices was due to price supporting measures put in place by the governments of rubber producing countries.
Nevertheless, we believe the rebound in latex prices will only be temporary and latex prices should continue to weaken further towards the RM7 per kg mark over the next few months as demand for rubber worldwide remains weak amid weaker economic conditions. Furthermore, we expect more supply to come onstream globally once the wintering season ends.
The risks include: (i) a sharp surge in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; and (ii) appreciating ringgit against the greenback.
Following from the above, our FY11 to FY13 net profit forecasts for Kossan Rubber Industries Bhd have been raised by 9.6% to 20.8% and by 5.9% to 7.6% for Adventa Bhd. As for Hartalega Holdings Bhd, our FY12 to FY14 earnings forecasts have been increased by a lower quantum of 3.4% to 9.1% after adjusting for a higher US dollar-ringgit exchange rate.
Given the stronger earnings outlook, we have raised our target price-earnings ratio (PER) for Kossan and Hartalega by one times. However, we are keeping our target PER of eight times unchanged for Adventa due to higher earnings risk.
Adventa’s results have been disappointing for the past four quarters. Together with the upward revisions to our earnings projections, we raise our fair value for Kossan to RM3.70 (from RM2.71) based on a target CY12 PER of nine times and Hartalega to RM7.19 (from RM6.06) based on target PER of 10 times.
Our fair value for Adventa is raised to RM1.79 (from RM1.67) based on unchanged target CY12 PER of eight times. We make no change to Top Glove’s fair value of RM4.93 as it is already in line with our target market PER of 14 times CY12 PER. All in, there are no changes to our “market perform” recommendations for these stocks. We maintain our “neutral” stance on the sector. — RHB Research, Feb 3
This article appeared in The Edge Financial Daily, February 8, 2012.
Maintain neutral: Earlier last month, we upgraded our recommendation for Top Glove Corp Bhd to “market perform” from “underperform” following two key developments.
First, latex prices had eased considerably and Top Glove’s management guided for latex prices to stabilise at around RM6 per kg over the next three to six months. Second, exchange rate movements have been favourable to glove manufacturers. These prompted us to lower our latex price assumptions by 5% to 5.5% to RM7.20 to 7.60 per kg while we raised our ringgit to US dollar assumptions for Top Glove to RM2.90 to RM3 per dollar from RM2.80 to RM2.90.
Following these changes, we are bringing our assumptions for the other glove manufacturers in line with our assumptions for Top Glove.
Since hitting a year-low of RM6.30 per kg on Jan 10, latex prices have since rebounded to around RM7.50 per kg currently. We believe the spike in latex prices was due to price supporting measures put in place by the governments of rubber producing countries.
Nevertheless, we believe the rebound in latex prices will only be temporary and latex prices should continue to weaken further towards the RM7 per kg mark over the next few months as demand for rubber worldwide remains weak amid weaker economic conditions. Furthermore, we expect more supply to come onstream globally once the wintering season ends.
The risks include: (i) a sharp surge in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; and (ii) appreciating ringgit against the greenback.
Following from the above, our FY11 to FY13 net profit forecasts for Kossan Rubber Industries Bhd have been raised by 9.6% to 20.8% and by 5.9% to 7.6% for Adventa Bhd. As for Hartalega Holdings Bhd, our FY12 to FY14 earnings forecasts have been increased by a lower quantum of 3.4% to 9.1% after adjusting for a higher US dollar-ringgit exchange rate.
Given the stronger earnings outlook, we have raised our target price-earnings ratio (PER) for Kossan and Hartalega by one times. However, we are keeping our target PER of eight times unchanged for Adventa due to higher earnings risk.
Adventa’s results have been disappointing for the past four quarters. Together with the upward revisions to our earnings projections, we raise our fair value for Kossan to RM3.70 (from RM2.71) based on a target CY12 PER of nine times and Hartalega to RM7.19 (from RM6.06) based on target PER of 10 times.
Our fair value for Adventa is raised to RM1.79 (from RM1.67) based on unchanged target CY12 PER of eight times. We make no change to Top Glove’s fair value of RM4.93 as it is already in line with our target market PER of 14 times CY12 PER. All in, there are no changes to our “market perform” recommendations for these stocks. We maintain our “neutral” stance on the sector. — RHB Research, Feb 3
This article appeared in The Edge Financial Daily, February 8, 2012.
