Analysts: Rubber glove firms offer tremendous upside

STOCK analysts are staying bullish on the prospect of rubber glove makers this year after a sterling 2009, convinced that the strong demand seen last year can be sustained.

Rubber glove companies including Supermax Corp Bhd (7106) have far outperformed the FTSE Kuala Lumpur Composite Index last year, having soared between 94 per cent and 540 per cent compared to a 45 per cent gain in the local benchmark.

"Despite the strong performance, their price earnings multiples remain at a discount to the market instead of the premium that they historically traded at," CIMB Research wrote in a note on January 6.

The sector stands at an average financial year 2010 price earnings multiples of 9.4 times, or just half the valuations during their peak at the end of 2006 and early 2007, it noted.
"We believe that the rubber glove companies are still undervalued and offer tremendous earnings upside due to their expansion programmes," CIMB said.

The stockbroker kept its overweight stance on the sector, with Adventa and Supermax remaining its top picks in the industry.

Its target price for Supermax was pegged at RM7.96, representing a 56 per cent potential upside from its last traded price of RM5.12. Adventa's target price was put at RM5.44.

"Many of the companies under our coverage are undertaking major capacity expansion, which will ensure earnings growth that is superior to the market," CIMB said, adding that factors that could extend the re-rating for the sector include the continued rising demand from the healthcare industry, ongoing capacity expansion and strong earnings growth.

Capital gains aside, Affin Investment Bank believes that shareholders may potentially be rewarded by another round of bonus issue or special dividends.

"Judging from past track record, glove manufacturers have been generous in rewarding shareholders via at least two to three rounds of bonus issues since their initial public offerings, backed by continued profitability and swelling retained earnings," Affin pointed out in a January 11 report.

Affin estimates that companies under its coverage, namely Kossan Rubber, Supermax and Top Glove, have enough share reserves to give out bonus shares.

"While this will not have any fundamental impact, any bonus issue exercise is positive to sentiment and share price," Affin said.