Kossan continues landbanking activities

Kossan Rubber Industries Bhd
(Dec 15, RM4.60)
Maintain “buy” with unchanged target price of RM5.05. Kossan announced last Friday the acquisition of a 13.3 acre (5.38ha) piece of freehold industrial land at Mukim Kapar in Klang, Selangor, for a cash consideration of RM39 million.

The purchase consideration implies a price tag of RM68 per sq ft. This is 40% higher than the price it previously paid for 9.3 acres of industrial land located close by in late 2013.

The acquisition will be funded via internally generated funds and/or bank borrowings, and is expected to be completed by the first quarter of financial year 2015 ending December 2015 (1QFY15).

Funding should not be an issue given the group’s low gearing level of 0.1 times as at end-3QFY14.

We understand the land is located near its existing plants. As such, we believe the site is well connected to necessary infrastructure for glove manufacturing, including natural gas supply. This should reduce the associated execution risks in the construction of new plants.

Management plans to develop this land after it completes the construction of two plants at the adjacent 15-acre site in 2016.

We are positive on this acquisition as it will help the group to achieve its long-term growth plan. Including this site, Kossan has 95 acres of vacant land available to drive its expansion plans.

Management guided that it could put up a warehouse and two plants with total annual capacity of 3.8 billion to  four billion gloves. This represents 18% to 19% of the group’s estimated production capacity at end-2015.
We maintain our “buy” rating on Kossan with an unchanged RM5.05 target price, based on 18 times FY15 earnings per share. We are keeping our earnings forecast unchanged, pending further details on the development plans for the land. — Alliance DBS Research, Dec 15

This article first appeared in The Edge Financial Daily, on December 16, 2014.

KLCI ends 1Q on a high

KUALA LUMPUR (March 30): The FBM KLCI ended the first quarter of 2012 on a high note, in line with the global markets that mostly picked up gains at the end of the quarter.

The 30-stock index rose 10.89 points to closet at 1,596.33 on Friday, lifted by blue chips including banking and Petronas-linked stocks.

The closing was just a tad below its all-time high of 1,597.08 that the index rose to on July 11 last year.

Year-to-date, the index racked up 65.6 points from its December 30 close of 1,530.73. Gainers edged losers by 402 to 360, while 334 counters traded unchanged. Volume was 1.25 billion shares valued at RM2.08 billion.

World stocks rose with Europe up more than half a percent on Friday, picking up gains at the end of the quarter and with investors eyeing a boost to the euro zone's bailout resources that ministers are expected to sign off on later in the day, according to Reuters.

Despite the strong quarter, sentiment across asset classes has turned bearish since mid-March due to fears of a slowdown in growth centred on China, and the conviction that a huge injection of central bank money may only be a panacea for Europe's debt troubles, it said.

At the regional markets, the Shanghai Composite Index rose 0.47% to 2,272.79, Taiwan’s Taiex added 0.77% to 7,933.00 and Singapore’s straits Times Index gained

Meanwhile, Japan’s Nikkei 225 closed 0.31% lower at 10,083.56, Hong Kong’s Hang Seng Index fell 0.26% to 20,555.58 while South Korea’s Kospi shed 0.02% to 2,014.04.

Affin Investment Bank Bhd vice president and head of retail research Dr Nazri Khan said that despite pockets of weakness from China market (Shanghai Composite at 10-week low) and soft economic data from the US and Europe, he expects the FBM KLCI to continue market uptrend supported by local liquidity and strong first quarter performance.

“The local market has ample liquidity at the sidelines, accommodative Bank Negara, low interest rates and government commitment for economic project. Plain and simple.

“We also believe the local market will take further cues from a strong USA market,” he said.

He added that there was a fairly reasonable speculative element in the small cap stocks to create some excitement near term (Carotec, Mtronics, Keywest, Focus, Tiger to name a few).

“Though we agree that the local market is overbought and investors may pause after recent sharp gains, we are yet to see any evidence of distribution to suggest serious market wind down in the near term,” he said.

On Bursa Malaysia, KLK was the top gainer and added 46 sen to RM24.60, F&N up 28 sen to RM18.88, Takaful 27 sen to RM3.39, United PLANTATION []s 18 sen to RM24.98, Kossan, Bursa and DiGi added 12 sen each to RM3.35, RM7.38 and RM4.06 respectively.

Among banking stocks, Hong Leong bank gained 24 sen to RM12.62, AMMB 10 sen to RM6.31, CIMB nine sen to RM7.69 and Maybank seven sen to RM8.87.

Among Pertronas-linked stocks, Petronas Dagangan rose 26 sen to RM18.94, Petronas Gas 10 sen to RM16.84 and Petronas Chemicals six sen to RM6.74.

Carotech was the most actively traded counter with 99.63 million shares done.

Other actives included CIMB, Focus, Ariantec, Metronic, YTL, Naim Indah Corp and Key West.

Decliners included Genting, Dutch Lady, sunchirin, Multico, Kulang, Shangri-La, Kulim, Fiamma, Advanced Packaging and TDM.



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Glove makers among top losers

KUALA LUMPUR (March 27): Glove makers Top Glove, Hartalega and Kossan were among the top losers in afternoon trade on Tuesday despite the overall firmer market.

At 2.46pm, the Top Glove was down 12 sen to RM4.53 with 350,900 shares done, Haratalega and Kossan lost seven sen each to RM8.02 and RM3.23. Supermax was unchanged at RM1.88.

The FBM KLCI was up 4.55 points to 1,587.53. Turnover was 1.18 billion shares done valued at RM802.06 million. There were 326 gainers, 342 losers and 344 counters unchanged.



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Kossan 4Q earnings dip to RM24.28m, FY11 RM92.9m

KUALA LUMPUR (Feb 24): KOSSAN RUBBER INDUSTRIES BHD []’s earnings fell 17.5% to Rm24.28 million in the fourth quarter ended Dec 31, 2011 from RM29.45 million a year ago as the gloves division was impacted by the high price of natural latex in 2011.

It said on Friday that its revenue was higher by 11.2% to RM281.53 million from RM252.97 million. Earnings per share were 7.46 sen compared with 9.15 sen.

For FY11, its earnings fell 18.3% to RM92.97 million from RM113.76 million in FY10. Its revenue increased 4.3% to RM1.092 billion from RM1.046 billion

On the prospects, Kossan said the technical rubber products division was growing steadily and the group was penetrating into projects for infrastructure products and more orders from overseas.

“In the gloves division, demand for gloves remains strong and vibrant. Management is positive the gloves division will continue to garner higher turnover and profit before taxation for financial year 2012,” it said.

Kossan added the ratio of turnover in this division is 60% natural latex and 40% nitrile latex gloves.

“An additional nine new single formers lines is expected to be ready by April 2012 with a capacity of 1.25 billion pieces per year. Turnover for total nitrile gloves is expected to move towards 48% and with higher profit margin; the group sees positive movement in profit before taxation,” it said.



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LCI snaps two-day winning streak as select blue chips weigh

KUALA LUMPUR (Feb 15): The FBM KLCI snapped its two-day winning streak and closed lower on Wednesday, lagging its regional peers, weighed by losses at select blue chips.

The FBM KLCI fell 4.75 points to 1,561.30.

Gainers led losers by 433 to 385, while 346 counters traded unchanged. Volume was 2.31 billion shares valued at RM2.15 billion.

Meanwhile, regional markets rose on Wednesday as investors hoped Greece would deliver on a commitment to enact harsh reforms, while comments from China's central bank governor saying Beijing would continue to invest in euro zone government debt aided sentiment, according to Reuters.

Asian shares, including Shanghai, Hong Kong and Japan, also broke through key technical resistances, after Zhou Xiaochuan said Beijing remains confident in the euro and in the ability of euro zone members to solve their debt problems, it said.

The Shanghai Composite Index gained 0.94% to 2,366.70, Hong Kong’s Hang Seng Index added 2.14% to 21,365.23, Japan’s Nikkei 225 rose 2.30% to 9,260.34, Taiwan’s Taiex was up 1.54% to 8,005.24, South Korea’s Kospi added 1.13% to 2,025.32 while Singapore’s Straits Times Index added 0.81% to 3,011.68.

On Bursa Malaysia, Petronas Dagangan was the top loser and fell 56 sen to RM18.22; Hartalega lost 34 sen to RM7.92, Aeon 15 sen to RM7.70, Kossan and Carlsberg down 11 sen each to RM3.44 and RM9.45, Petronas Gas 10 sen to RM16.64, while Nestle, IGB, Hong Leong Bank and KLK fell eight sen each to RM55.40, RM2.67, RM11.62 and RM25.38 respectively.

Naim Indah Corp was the most actively traded counter with 268.3 million shares done. The stock rose four sen to 52 sen.

Other actives included TMS, Dataprep, Compugates, Tiger Synergy, Perisai, Emico, SAAG and KHSB.

Among the gainers, BAT added 70 sen to RM52.48, Amtek 27 sen to 50 sen, Kim Hin, SPB and Lafarge Malayan Cement up 16 sen each to RM1.44, RM3.74 and RM7.08 respectively, TSM 15 sen to RM1.47, while SapuraCrest added 12 sen to RM5.05.



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Improving outlook ahead for rubber gloves

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.



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Hartalega rises to record high on lower nitrile prices

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.



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Glove makers rise in early trade

KUALA LUMPUR (Jan 30): Shares of glove manufacturers, led by Hartalega advanced in early trade on Monday on improving outlook for the sector.

At 9.30am, Hartalega rose 33 sen to RM7.23, Top Glove was up 13 sen to RM5.18, Supermax added 11 sen to RM2.26 while Kossan was up three sen to RM3.50.

CIMB Research in note Jan 27 had maintained its Outperform rating on Hartalega and said the affordability of nitrile gloves had improved, primarily due to a 35% drop in nitrile price, in contrast to a 17% rise in natural rubber price.

It said this was positive for Hartalega as it will underpin demand for nitrile gloves at a time when EU healthcare budgets are being cut.

“We retain our valuation basis of 11.75x forward P/E, 10% discount to our Top Glove target. Nitrile gloves are now 20% cheaper to produce versus NR, which will underpin demand.

“Hartalega is our top pick in the glove sector with leading returns and margins. Maintain Outperform,” it said.



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KLCI slips at mid-morning as regional rally takes a breather

KUALA LUMPUR (Jan 27): The FBM KLCI slipped at mid-morning on Friday, in line with the weaker sentiment at key regional bourses as markets took a breather from the recent rally.

At the global markets, a broad asset rally inspired by the US Federal Reserve's pledge to keep rates low paused on Friday, as investors sought to gauge how sustainable the burst of optimism will be while waiting for the outcome of crucial Greek debt talks, according to Reuters.

The FBM KLCI fell 3.74 points to 1,520.12 at 10am, weighed by losses at select blue chips.

Gainers edged losers by 235 to 205, while 252 counters traded unchanged. Volume was 538.98 million shares valued at RM369/81 million.

At the regional markets, Japan’s Nikkei 225 edged down 0.02% to 8,847.62 and South Korea’s Kospi shed 0.14% to 1,954.48, while Hong Kong’s Hang Seng Index added 0.24% to 20,487.90 and Singapore’s Straits Times Index gained 0.25% to 2,901.54.

BIMB Securities Research in a note Jan 27 said it was a mixed trading day on Wall Street on Thursday from a mixed batch of earnings and economic data in the US.

Lower new home sales, higher durable goods orders and higher jobless claims had all placed investors on an indecisive mode, it said.

As a consequence, the Dow Jones Industrial Average erased early gains to end the session 22 points lower, it said.

The research house said whilst negotiations in Athens are still ongoing, most European indices reversed their losses from the past few sessions to chalk up impressive gains possibly on a technical rebound.

As for Asia, equity performances remain strong with almost all closed on a high, it said.

“Locally, the FBM KLCI gained 4 points to close above the 1,520 mark with interests again centred on the lower liners and we expect the same for today.

“It is interesting to note that the MYR is gaining momentum against the greenback hovering at RM3.04/US$1 indicating that funds may be flowing back into the country again.

“Recent calls to overweight the PLANTATION [] sector are bearing fruits and our top calls are Hap Seng Plantations and TH Plantations which are still low on valuations,” it said.

Among the decliners on Bursa Malaysia, Genting Plantations fell 25 sen to RM9.40, TDM 13 sen to RM4.29, Fima Corp 12 sen to RM6.14, Hong Leong Industries nine sen to RM4.30, Public Bank eight sen to RM13.32, Kossan seven sen to RM3.40, while Aeon, Delloyd and Can-One fell six sen each to RM7.40, RM3.44 and RM2.03.

Gainers included IJM Corp, Scicom, Nestle, Hartalega, DRB-Hicom, AZRB, Amway, Shell and MISC, while the actives included TMS, Karyon, DBE Gurney, Jotech, UEM Land and DRB-Hicom.



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Margin revival for rubber gloves on fast track

Rubber gloves
Upgrade to overweight from neutral: We have upgraded the rubber glove sector to “overweight” as we believe earnings recovery is in the early stages of a cycle and is bound to gain momentum on the back of sustained margin revival.

As it is, quarterly earnings before interest, tax, depreciation and amortisation (Ebitda) margins of glove manufacturers are still two to four percentage points below normalised levels, implying upside potential.

We reckon glove manufacturers are poised to reap higher margins from time-lag induced imperfect price adjustments from: (i) lower input costs due to easing latex price and; (ii) the strengthening US dollar against the ringgit. We expect higher margins to kick in over the next few quarters as cheaper latex costs are fully reflected in average selling prices.

Despite a sharp drop of over 40% in latex price from an all-time high of RM10.60 per kg (February 2011), we see further easing in latex prices as imminent due to a worse than anticipated rubber glut and weakening demand. This will extend support for a sustained improvement in margins for glovemakers.

We understand China’s stockpile of natural rubber (NR) has been on a progressive rise since August, leading to an estimated surplus of 365,600 tonnes as at end-December 2011. Even though global rubber supply for this year is forecast to rise by only half of 2011’s additional production of 610,000 tonnes, this will inevitably exert further downward pressure on latex prices.

Incidentally, the global automobile industry, as led by China with an estimated 23% market share, is expected to grow at a slower rate this year, in tandem with the country’s slower economic growth outlook.

As it is, China’s vehicle sales grew a mere 3% last year, against 32% in 2010. The world’s automobile industry consumes circa 70% of global NR output.

In our view, the structural shift from NR to nitrile gloves will continue alongside industry trends as consumers typically tend to migrate upwards along with rising disposable income.

However, the rate of switching should become less drastic now, given the softening latex price. Most encouragingly, prices of NR gloves are currently at a 7% to 10% discount to nitrile variants. NR gloves were sold at an estimated 12% to 13% premium to nitrile gloves in 2011.

The reversal in ASPs resulting in a favourable price differential should thus help NR gloves claw back some lost market share.

All in, we have raised our earnings forecasts by 35% to 48% for Top Glove Corp Bhd and 2% to 10% for Kossan Rubber Industries Bhd. We have imputed higher utilisation rates, latex price forecast of RM5.50 to RM6 per kg as well as our latest in-house foreign exchange rate at US$1:RM3.10 for both Top Glove and Kossan.

We have upgraded Top Glove to a “buy” with a higher fair value of RM6.15 per share (previously “sell”, fair value: RM3.10) based on a higher fair price-earnings ratio (PER) of 19 times revised FY13F earnings. Our valuation pegs the stock at 0.5 standard deviation above its five-year mean of 16 times, which we deem reasonable in lieu of the improving core fundamentals.

Top Glove is now our top “buy” for the sector as the group is a prime beneficiary of easing latex prices. With over 78% of total production (37 billion pieces per year) in NR gloves, the group is the “purest” and largest NR glove manufacturer. Based on past trends, the stock had seen an upward PER re-rating of eight to 12 times during previous periods of declining latex prices.

Accordingly, we upgrade Kossan to a “buy with a higher fair value of RM4.31 per share (previously “hold”, FV: RM3.38) based on a higher fair PER of 12.5 times revised FY12F earnings.

Our valuation is a tad above the stock’s 10-year mean of 11 times, but still at some 35% discount to Top Glove’s fair PER of 19 times.

We continue to like the group for its less susceptible earnings portfolio underpinned by its more balanced product mix. — AmResearch, Jan 17


This article appeared in The Edge Financial Daily, January 19, 2012.



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Maybank IB Research maintains Neutral on glove makers

KUALA LUMPUR (Jan 12): Maybank Investment Bank Research is maintaining its Neutral outlook on the Malaysian glove makers industry.

It said on Thursday that though 2012 is a recovery year for the latex-focused players “but we believe overcapacity in latex powdered segment will limit the earnings recovery”.

Maybank Research pointed out that on the other hand, nitrile-focused players will see margin compression due to industry-wide expansion into nitrile segment, it said.

“Nonetheless, our top pick is Hartalega (TP RM6.80) due to the dichotomy between its high profitability and undeservingly low forward PER of only 9.0 times. We also have a Buy call on Kossan (TP: RM3.50) and Sell on Top Glove (TP: RM3.40),” said Maybank Research.



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Kossan set to bounce, says ECM Libra Research

KUALA LUMPUR (Jan 12): ECM Libra Research is recommending KOSSAN RUBBER INDUSTRIES BHD [] a Buy and said commercial operations of the company’s new production lines are expected to commence at end-2Q12.

It said the new capacity would increase output by 2 billion gloves to 14 billion, adding that Kossan has managed to secure buyers for more than 85% of the new capacity.

In a note Thursday, ECM Libra said the current utilisation rate as at end Dec 2011 was 90%.

The research house said valuations were undemanding with Kossan trading at 9.7x FY12 EPS (vs Top Glove’s 24x and Supermax’s 11x FY12).

“The valuation gap should narrow as: (i) Kossan moves up the value chain by offering higher margin surgical and clean room gloves; and (ii) Kossan’s product mix contains less natural rubber glove which is sensitive to movements in latex price.

“Recommend BUY with RM4.02 target price based on 11x FY12 EPS, in line with its historical average,” it said.



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KLCI closes higher for third day running, gains capped

KUALA LUMPUR (Jan 10): The FBM KLCI closed marginally higher for the third day running on Wednesday, but gains remained capped in line with the mixed sentiment at regional markets.

The FBM KLCI edged up 0.30 of a point to close at 1,522.29.

Gainers beat losers by 437 to 384, while 301 counters traded unchanged. Volume was 1.91 billion shares valued at RM1.94 billion.

Meanwhile, Europe's persistent debt crisis kept the single currency and global stocks under pressure on Wednesday, threatening to overshadow a slight improvement in the economic outlook that has driven a solid rally in world equity markets, according to Reuters.

European shares hit a one-week closing high on Tuesday, and U.S. stocks reached a five-month peak, after an upbeat forecast by aluminum company Alcoa about the demand outlook for the metal and amid rising hopes of a policy easing in China.

At the regional markets, Hong Kong’s Hang Seng Index rose 0.78% to 19,151.94, Japan’s Nikkei 225 added 0.30% to 8,447.88, Taiwan’s Taiex up 0.13% to 7,188.21 and Singapore’s Straits Times Index rose 1% to 2,747.13.

Meanwhile, the Shanghai Composite Index fell 0.42% to 2,276.05 and South Korea’s Kospi lost 0.41% to 1,845.55.

On Bursa Malaysia, glove makers were in focus on expectations that earnings going forward would see improvement given the outlook for favourable natural rubber prices.

Supermax jumped 39 sen to RM4.32, Kossan 27 sen to RM3.57, Hartalega up 22 sen to RM6.22, Top Glove 19 sen to RM5.25, Adventa 11 sen to RM1.73, Latexx 10 sen to RM2.01 and Rubberex added 3.5 sen to 73 sen.

Other gainers included Malayan Flour Mills that added 22 sen to RM7.40, Dutch Lady 20 sen to RM26.20, Hai-O 19 sen to RM2.16 and Mudajaya 17 sen to RM2.49.

Decliners included PPB and Hibiscus that fell 16 sen each to RM17.04 and RM1.02, Genting and KLK down 14 sen each to RM10.76 and RM24.70, Super Enterprise, OFI and Can-One 13 sen each to 82 sen, RM1.52 and RM1.65, while Sui Wah fell 11 sen to RM1.46.

Takaso was the most actively traded counter with 83.6 million shares done. The stock added half a sen to 25 sen.

Other actives included Mudajaya, Hubline, Hibiscus, Iris Corp and XDL.



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Glove makes among top gainers, Supermax leads

KUALA LUMPUR (Jan 11): Glove manufacturers were in focus on Wednesday, emerging as the top gainers as optimism returned following expectations of weaker latex prices and a more stable foreign exchange.

At 3.24pm, Supermax was up 38 sen to RM4.31 with 8.13 million shares done, Top Glove added 22 sen to RM5.28, Hartalega 20 sen to RM6.20 and Kossan 19 sen to RM3.49.

Top Glove-CI jumped 15.5 sen to 30.5 sen while Supermax-CE added four sen to 7.5 sen with 22.32 million units done.

Sentiment perked up following positive comments from Supermax executive chairman Datuk Seri Stanley Thai.

He expected the company to record between RM100 million and RM110 million in profit after tax for the financial year ended Dec 31, 2011.

For the nine-months ended Sept 30, FY11, Supermax reported RM77.86 million earnings on the turnover of RM750.70 million.

As for 2012, Thai was upbeat about a better year as natural rubber price was expected to fall to between RM5.50 and RM6 per kg in 1QCY2012 while foreign exchange was expected to be stable.

Meanwhile, CIMB Equities is maintaining its Sell rating on Top Glove Corp Bhd and target price of RM3.61, which is still based on a forward price-to-earnings of 13.05 times.

“Consensus numbers are still too high and valuations expensive. Hartalega is a better proxy for the glove sector,” it said on Wednesday.

CIMB Research said Top Glove’s 1Q12 briefing revealed that demand has not picked up despite a 40% slump in rubber latex price from last April’s peak.

The research house added this was due to overcapacity and cautious business sentiment in the EU and US. Also, hospitals and governments are better prepped for ‘flu outbreaks.



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FBM KLCI slips below 1,520-level at mid-day break

KUALA LUMPUR (Jan 11): The FBM KLCI extended its losses at the mid-day break on Wednesday and fell below the 1,520-point level, weighed by select blue chips.

The FBM KLCI was down 2.20 points to 1,519.79 at the mid-day break.

Gainers edged losers by 344 to 327, while 303 counters traded unchanged. Volume was 1.11 billion shares valued at RM903.12 million.

The ringgit weakened 0.05% to 3.1348 versus the US dollar; crude palm oil futures for the third month delivery fell RM13 per tonne to RM3,196, crude oil shed 45 cents per barrel to US$101.79 while gold added US$4.58 an ounce to US$1,636.93.

At the regional markets, Japan’s Nikkei 225 rose 0.17% to 8,436.41, Hong Hong’s Hang Seng Index up 0.09% to 19,020.85, Taiwan’s Taiex added 0.39% to 7,206.95 and Singapore’s Straits Times Index gained 0.32% to 2,728.66.

The Shanghai Composite Index fell 0.42% to 2,276.15 and South Korea’s Kospi lost 0.19% to 1,849.64.

Among the decliners on Bursa Malaysia, Super Enterprise fell 19 sen to 76 sen, PPB down 12 sen to RM17.08, GAB lost 10 sen to RM12.32, United Malacca, Telekom, Tradewinds and Harvest Court down nine sen each to RM6.70, RM4.82, RM9.58 and RM1.51 respectively, while KLK and Carlsberg lost eight sen each to RM24.76 and RM8.73.

Meanwhile, glove makers were in focus as investors viewed the softening natural rubber prices as positive for the companies.

Furthermore, Supermax Corp Bhd executive chairman Datuk Seri Stanley Thai said the company was expecting to achieve net profit between RM100 million to RM110 million and sales of RM1 billion for FY2011 ended Dec 31.

He said natural rubber price expected to fall to between RM5.50 to RM6 in 1QCY2012 and expected a better FY2012 due to softening natural rubber price and stable forex.

Among glove makers, Supermax rose 37 sen to RM4.30, Kossan 19 sen to RM3.49, Top Glove 17 sen to RM5.23, Hartalega 15 sen to RM6.15, Adventa 13 sen to RM1.72 and Latexx 11 sen to RM2.02.

Takaso was the most actively traded counter with 62.5 million shares done. The stock added 1.5 sen to 26 sen.

Other actives included Mudajaya, Hubline, Supermax and Maybulk.



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Latex glove makers to bounce back

KUALA LUMPUR: Malaysia’s largest latex glove makers, many of them world leaders, had a tough 2011 on many fronts, as most experienced lower on-year profits and margins. However, analysts say their fortunes are improving going into 2012 as the emerging threat of bird flu in China and Hong Kong may attract investor interest to these counters.

Last Saturday’s death of a man in China from bird flu or influenza H5N1 — the reported human case in the country in 18 months — has put health authorities in the region on alert although the virus does not spread from person to person. In December, Hong Kong raised the city’s bird flu alert level to “serious” and culled thousands of chickens after three birds tested positive for the H5N1 virus strain.

Back in 2009, the H1N1 pandemic led to surge in demand for gloves which led to overstocking by healthcare providers and major distributors, subsequently contributing to a challenging operating environment for glove makers in 2011.

According to TA Research, a 1% drop in latex prices could lead to a 4% to 5% increase in net profit for Supermax and Top Glove.

While it is unclear how serious a threat H5N1 is at this juncture, other factors are looking up for latex glove makers.

For one, the US dollar — the currency glove-makers are paid in — have appreciated versus the ringgit from their lows of around the 2.90-levels in 2011 to about 3.18 now. TA Securities, for instance, calculated that a 1% appreciation in the greenback could work out to some 2% to 3% higher earnings for Top Glove Corp Bhd and Supermax Group Bhd.

Hon Seow Mee, an analyst with HwangDBS Vickers Research, who earlier in predicting the rout for glove makers in 2011, sees the stronger greenback boosting revenues. “Our sensitivity analysis shows that every 1% increase in US dollar versus the ringgit could lift earnings by around 5%,” Hon wrote in a note dated Dec 20.

Nonetheless, given the volatility in currency trends, she pointed out that glove makers are likely to hedge US dollar exposure, something that could result in wide fluctuations in translation gains or losses.

Whatever the case, the lower cost of latex is definitely a plus point for glove makers like Top Glove and Supermax which sell more gloves made of natural rubber than synthetic (nitrile) rubber, analysts said. Latex — which suddenly spiked from an average of RM3.30 per kg end-2009 to never-before-seen levels of RM10.60 per kg in February 2011 — accounts for 60% to 70% of production cost.

Prices had since declined by 37% to average around RM6.70 per kg in December 2011. The expected slower demand from Chinese automakers in 2012 means latex prices may continue to ease or stabilise at current levels, analysts said.

“China’s auto market has slowed down and tyres use up 70% of global natural rubber. A lower demand from the tyre industry will lead to excess capacity in the industry,” Jason Yap, an OSK Research analyst who tracks the rubber glove sector, told The Edge Financial Daily recently.

He expects latex prices to be less volatile in 2012. “As the European market is still uncertain, there will be less speculative elements on the commodity side,” Yap said, forecasting prices to stay around RM6 to RM7 per kg this year and over the longer term.

One factor to watch is how latex prices perform ahead of the low production “wintering” season between February and April, analysts said.

According to TA Research, a 1% drop in latex prices could lead to a 4% to 5% increase in net profit for Supermax and Top Glove. To be sure, actual numbers may differ given the impact of other factors like demand as well as product mix.

Nitrile currently accounts for 33% and 17% of Supermax and Top Glove’s production mix respectively, according to a recent report by TA Securities. New glove production lines are able to switch between producing nitrile and latex gloves, officials at both companies have said.

Conversely, synthetic rubber gloves make up 80% of production of Hartalega Holdings Bhd, the world’s largest nitrile glove maker, which did much better than its peers in 2011. While the price of nitrile, a byproduct of crude oil, too has declined from its peak in mid-2011, the decline is smaller than that of latex, analysts said. Crude oil is still near US$100 (RM317) levels.

Latex prices, on the other hand, may slide further than the price of hard rubber, which is supported by the Thai-government. Thailand’s floor price of US$3 per kg for hard rubber implies a floor price of roughly RM5.70 for latex, which is 40% water, OSK’s Yap estimated.

He also sees latex glove players benefiting from the production of thinner gloves, which cost less to produce and had gained acceptance as customers searched for cheaper alternatives when latex prices spiked in 2011.

Given these factors, analysts think latex glove players have a greater chance of better growth in 2012 versus nitrile glove-makers. TA Securities, for instance, recently wrote that “2012 could see a glut of nitrile gloves” given that manufacturers here and in China had ramped up production when demand was strong.

While a rise in nitrile prices is less of a worry, there is concern over potential competition from rivals in China, something that would put pressure on pricing and margins. According to Yap, the Chinese government is also offering rebates to its nation’s glove-makers, which allows them to undercut competitors.

Even so, analysts do not see the current leading nitrile glove player, Hartalega, faring badly in 2012.

“I don’t believe Hartalega will be significantly affected. Competition will be there but because of its high technology, it actually produces gloves targeting the high-end market, which I think Chinese [competitors] may take some time to penetrate,” said Yap.

Hartalega has 11 “buys”, one “hold” and zero “sell”, according to Bloomberg. With an RM8.44 price target, CIMB Research is the most bullish, while RHB Research is the least with a RM6.06 valuation. Hartalega closed at RM5.84 on Dec 30.

Kossan, on the other hand, has 11 “buys” and five “holds” with target prices ranging between Nomura Research’s RM2.51 and OSK’s RM5. It closed at RM3.25 on Dec 30, up 2.85% for the year.

Is consensus behind the curve on Top Glove, or have prices run ahead of fundamentals?
While Top Glove has only five analysts calling it a “buy” versus seven “hold” and 10 “sells”, its stock price had continued to appreciate to reach RM5 on Dec 30. That’s ahead of 13 of the 17 price targets available on Bloomberg.

For Supermax, OSK is the most bullish of six analysts with a “buy”, valuing it at RM5.50. Kenanga Research has the lowest price target of RM2.94, with a “hold” recommendation.



This article appeared in The Edge Financial Daily, January 3, 2012.



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Margin recovery for rubber gloves in 2012

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.



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Rubber gloves: Sequential earnings growth gaining momentum

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.



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Cheaper latex a positive for glovemakers

KUALA LUMPUR: Latex prices, which hit fresh lows in recent days, are seen to be on a downward trend in the coming months in anticipation of lower demand by major industrial users, a positive for natural rubber (NR) glove producers although other concerns linger.

Analysts said rubber prices could be stifled by lower demand due to the eurozone sovereign debt crisis, besides automotive sector supply chain disruption from the floods in Thailand. Normalising demand for rubber gloves in the absence of disease outbreaks is another factor underlying lower consumption of rubber in the coming months.

“There is a downside bias to our forecast for rubber prices,” an analyst with MIDF Amanah Investment Bank Bhd told The Edge Financial Daily.

MIDF’s forecast indicates that latex will trade at an average of RM9 a kg this year before falling to RM8.75 in 2012. An analyst said the current situation would benefit glovemakers with a higher composition of NR gloves than synthetic rubber or nitrile glovemakers. Notable players include Top Glove Corp Bhd whose portfolio comprises 81% natural rubber gloves with the balance 19% being nitrile products.

Supermax Corp Bhd has a ratio of 80:20 for natural and nitrile gloves respectively while Kossan Rubber Industries Bhd has a ratio of 55:45.

Concerns over normalising demand for gloves due to the absence of outbreaks have given rise to fears of a price war among players, which could hurt the profit margins of these companies, the analyst added.

“Buyers of rubber gloves are adopting a wait and see attitude in anticipation of rubber prices going down further,” she said. Latex makes up some 60% of glovemakers’ cost.

The analyst said that while floods in Thailand have caused supply chain disruptions for the automotive sector, the situation there has begun to recover, and this is expected to lend support to rubber prices.

OSK Research Sdn Bhd analyst Jason Yap said he expects rubber prices to decline in the long term as demand is seen to be anaemic. This is due to moves by glovemakers to increase output of nitrile products and normalising demand for gloves.

Yap also said the global automotive sector, which consumes 70% of world rubber output, encountered setbacks against a weak global economic backdrop and floods in Thailand.

Thailand, Indonesia and Malaysia are the world’s top producers and exporters of rubber, accounting for 70% of global output. It has been widely anticipated that these top suppliers would embark on measures to stem the decline in natural rubber prices.

Policymakers in Thailand, for example, plan to spend 10 billion baht (RM1 billion) to increase inventory of the commodity. It was reported that a soft loan of some 10 billion baht would be given to the country’s estimated 600 cooperatives to purchase rubber from farmers at 95 baht per kg. The move is expected to drain supply out of the market to support prices of the commodity. Lawmakers there have also encouraged tappers to delay tapping between now and January next year to cut supply.

OSK’s Yap said amid expectations that top rubber producers will stem the decline in rubber prices, glove buyers are anticipated to increase their inventory ahead of the next year’s wintering season, when latex production is lower.

Rubber prices declined to fresh lows in recent days on expectation that the eurozone sovereign debt woes and lower vehicle output by major automotive players in Thailand due to the floods will reduce demand for the commodity.

Over the last six months, Malaysian latex prices have fallen 32% from a high of RM9.51 a kg on May 27 to RM6.43 on Nov 14.

The eurozone debt woes are far from over. Economists expect economic activities there to further weaken after a survey involving purchasing executives indicated that the manufacturing and service industries declined further last month leading to expectations of a contraction in the eurozone’s GDP in 4Q11 and 1Q12.

As the automotive sector consumes 70% of world rubber supply, a perceived weakness in the automotive industry will naturally impact rubber prices.

The floods in Thailand are creating a second major supply disruption in the global automotive sector since the March 11 earthquake and tsunami in Japan. According to news reports, the floods in Thailand have spread across 64 of Thailand’s 77 provinces and affected seven industrial enclaves where Honda Motor Co and auto parts makers have set up factories.

Global automotive players are also feeling the pinch. According to news reports, car factories across the Americas, and Asia, including Malaysia and Indonesia, will see lower vehicle output due to the supply chain disruption.

RHB Research Institute wrote in a note last Friday that it had revised downwards its 2011 total industry volume (TIV) for the Malaysian automotive sector to 604,000 units compared with 616,000 units previously.

This follows guidance from the Malaysian Automotive Association (MAA) that vehicle sales here would decline this month due to supply disruptions resulting from the floods in Thailand.

Year-to-date till October, Malaysian TIV fell 0.3% to 503,898 units, according to MAA.


This article appeared in The Edge Financial Daily, November 21, 2011.



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Kossan set to bounce

Kossan Rubber Industries Bhd (Nov 18, RM3.08)
Upgrade to buy at RM3.07 with revised target price of RM3.59 (from RM3.04): Kossan’s 9MFY11 results were in line with our and consensus expectations, accounting for 70% and 68% of the full-year figure respectively. As expected, 9MFY11 earnings were 24.1% lower year-on-year (y-o-y) at RM67.5 million.

The good performance in 3QFY11 is unsurprising as the latex price has softened to RM6.77 per kg from its highest level in April 2011 of RM10.93. Higher earnings of RM23.6 million (+12.9% quarter-on-quarter [q-o-q]) were mainly anchored by strong results from both its divisions. Pre-tax profit surged 25.2% q-o-q for its gloves (due to lower latex price) and 16% for its technical rubber products (TRP) (strong demand from automotive sector). Earnings before interest and tax (Ebit) margin for 3Q fell within our estimate of 11% to 12% at 11.8%. We expect Ebit margin for FY11F to average around 11.5% to 12%.

Kossan has declared an interim tax-exempt dividend of three sen which is expected to be paid on Dec 20. The three sen accounts for about 40% of our full-year figure.

We are rolling our valuation to FY12F with a price-earnings ratio of 10 times, which is Kossan’s three year-historical average PER. Thus, we derive a higher target price of RM3.59 (from RM3.04). Therefore, we are upgrading our call to “buy” from “neutral” previously. We believe that average FY12 PER of 10 times is sensible given that Top Glove Corp Bhd has always traded at a premium among glove players with a multiple of 14 times and Hartalega Holdings Bhd at 11 times. — MIDF Research, Nov 18


This article appeared in The Edge Financial Daily, November 21, 2011.



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