Glove makers continue to slide

KUALA LUMPUR: Glove manufacturers were among the major losers on April 13, led by TOP GLOVE CORPORATION BHD [] and KOSSAN RUBBER INDUSTRIES BHD [], on concerns over raw material costs after rubber prices jumped to a 20-month high in Japan, and the ringgit’s appreciation against the US dollar.

Top Glove lost 60 sen or 4.4% to RM12.90, Kossan fell 35 sen or 4.4% to RM7.56 and SUPERMAX CORPORATION BHD [] shed 25 sen or 3.6% to RM6.64. LATEXX PARTNERS BHD [] gave up 22 sen to RM3.77, HARTALEGA HOLDINGS BHD [] 18 sen to RM7.60 and ADVENTA BHD [] eight sen to RM3.37.

The FBM KLCI slipped 5.09 points or 0.4% to 1,334.52 on April 13.

Analysts were mixed on glove makers’ prospects following the battering.

MIDF Research said the slump on April 13 was a healthy correction and investors should view any weakness in the share prices of the glove counters as an opportunity to accumulate for short-term trading.

It said the companies’ shares rebounded strongly after receding by 11.9% to 14.4% at end-February and early March, adding there was potential upside as the rubber glove makers’ 1Q10 results were expected to be favourable with potential bonus issues looming.

“We are maintaining our trading buy recommendation and all our target prices (TP) for the glove companies under our coverage. Our TP for Top Glove is RM14.68, based on 17 times EPS10, after factoring its net cash of 88 sen per share.

Kossan and Hartalega’s TPs are RM9.04 and RM8.80 respectively, derived from 14 times and 14.5 times PER,” it said in a note released on April 13 afternoon.

The research house said the outlook for the glove sector remained favourable, adding that with the current demand-supply disparity, glove manufacturers were enjoying better cost-passing power.

Top Glove indicated that it was able to pass on up to 90%-100% of the variance in costs to customers, it said.

“Besides, the time lag for glove producers to pass on the additional costs is shorter now compared with roughly two months previously.

“This is manifested by their sustainable strong earnings margin despite higher latex price and weaker US dollar. We believe that earnings margin should be safeguarded in 1H10 given higher plant utilisation rate and better pricing power,” it said.

MIDF Research said excess supply in 2H10 and beyond was its main concern, as the glove companies it had visited were on track with their expansion plans to cater for increasing global demand.

“Although we are positive on the consistent global glove demand growth, we are also concerned about the potential excess glove production capacity, which we believe will affect earnings margin, and hence lower earnings growth moving forward (we still expect positive growth rate).

“We gather from industry players that excess supply is a risk but it only affects a certain segment, namely the low-end products. This is due to the barrier of entry for the higher-value and R&D-focused products,” MIDF said.

The research house added, however, that its concerns might be eased by stronger-than-expected global glove demand and the delay in the expansion plans.

Other risks were valuation issues, as the three glove companies under its coverage were trading at above their respective five-year average PER, it said.

OSK Investment Research senior analyst Jason Yap maintained his overweight recommendation on the glove sector, and reiterated his buy calls on Top Glove, Supermax and Kossan.

He said the fall on April 13 was a correction, with punters taking profit as the share prices had reached high levels.

“The concerns about raw material costs will also dissipate, as latex price is seasonal and should taper down after May. The companies can also pass on the cost to end-buyers.

“We expect absolute figure of bottom line to be retained but margins to gradually decline because of the higher revenue base if glove makers increase prices to take into account raw material prices or currency exchange,” he said.

Meanwhile, Maybank Investment Bank Bhd head of retail research and chief chartist Lee Cheng Hooi said the rubber glove sector was generally already highly priced, as evident from the fluctuation in prices over the past few trading days.

“The stocks in the sector have had quite a lengthy positive run already. We would recommend investors to take profit and step aside for now,” he said.

Lee said the key support level for Top Glove was RM12.25, Supermax RM6.04, Kossan RM7.19 and Hartalega RM7.62. If prices went below these levels it would be critical, he added.

He said Latexx and Adventa were already trading below their key support levels of RM3.83 and RM3.49, respectively.

Last week, AmResearch downgraded the glove sector to underweight. It noted that demand growth had probably peaked and should decelerate going forward, thus shift of pricing power from manufacturers to consumers would accelerate, exacerbated by additional production capacity as early as mid-year.

AmResearch, which had downgraded Top Glove and Kossan to hold with fair values of RM12.50 and RM7.65, respectively, told The Edge Financial Daily on April 13 it was maintaining its recommendation on the sector and target prices for the two stocks.

Written by Surin Murugiah,Wednesday, 14 April 2010 00:18

OSK maintains Overweight on Malaysian rubber glove makers

OSK maintains Overweight on Malaysian rubber glove makers, following approval of healthcare overhaul bill by U.S. congress; analyst Jason Yap estimates incremental demand from U.S. arising from approval of bill at 768 million gloves annually; says while additional demand "not big," this will add to further supply constraints as glove makers already running at maximum utilization rate and may not have room to ramp up production to meet any surge in demand. "The strong demand will reaffirm their ability to sell the gloves at a premium and pass on 100% of the cost increase to customers," Yap says; names Top Glove (7113.KU), Supermax (7106.KU) and Kossan (7153.KU) as Top Picks. Top Glove last traded +1.2% at MYR13.08, Supermax +1.3% at MYR6.46, Kossan +3.1% at MYR7.64

A higher rating for branded glove firms?

Most gloves produced under OEMs sold to branded resellers. The rubber glove industry is one in which Malaysia is leading globally. However, on closer examination, it would appear the bulk of rubber glove companies like Top Glove Corp Bhd, Hartalega Holdings Bhd, Kossan Rubber Industries Bhd and Latexx Partners Bhd are original equipment manufacturers (OEMs) that produce rubber gloves sold under the reseller’s brand name. Most of the resellers like Kimberley-Clark, McKesson Corp, Cardinal Health, Medline and Ansell provide a wide range of healthcare and hospital products.Increasingly, these companies are manufacturing less and outsourcing production to OEMs. Instead, they are focusing on research and development (R&D), brand development and distribution. Although, OEM rubber glove manufacturers in Malaysia can make reasonable returns due to the limited number of large rubber glove makers, the scope to increase margins is limited as resellers control the brand and can shift their orders to other OEM rubber glove manufacturers offering lower prices.The margins of OEM manufacturers are thus determined by the type of gloves they produce and their operational efficiency.
Hartalega enjoys the highest margin among OEM manufacturers due to its operational efficiency and a higher percentage of nitrile glove production which currently enjoys better margins. Latexx also enjoys good margins as its production facilities are concentrated in just one location, thereby minimising overheads and ensuring better quality control.

Among the listed rubber glove companies, the only two involved in selling rubber gloves under their own brands are Supermax Corp Bhd and Adventa Bhd. Around 55% of rubber glove sales by Supermax consist of its own brand of gloves. In 2008, Supermax’s dental brands achieved a commendable 7.1% share of the dental glove market in the US. Nevertheless, the challenge faced by Supermax is that large US hospital chains would normally like to simplify logistics by buying from companies that can provide a full range of healthcare and hospital products. Hence, Supermax sells mainly through distributors and dealers who target smaller establishments like nursing homes, clinics, dentists, laboratories rather than large hospital chains. Supermax enjoys operating profit margins of around 30% for gloves sold under its own brand, although margins are currently much higher in Mexico and Brazil where there is a shortage of gloves.

Adventa is the only listed company in Malaysia that is producing surgical gloves which require a more complicated process. Around 60% of surgical gloves are sold under its own brand throughout the world. To develop cutting-edge surgical gloves, Adventa has a R&D centre with eight chemists and six assistant chemists. Its gloves are also tested by three surgeons who provide invaluable feedback. Adventa is in the process of patenting some of its inventions. Operating profit margins for its own brand of surgical gloves are as high as 40%. Recognising the need to provide a full range of hospital products, Adventa has set up a distribution arm to sell a range of hospital and disposable products utilising its global network of distributors. Due to strong demand for its surgical gloves, Adventa is planning to expand its surgical glove capacity from 250 million gloves per annum currently to 350 million per annum by year-end and 450 million per annum by the end of 2010. 

The current valuations of Malaysian rubber glove companies do not seem to reward companies that sell gloves under their own brands. In fact, Supermax and Advanta have among the lowest price-earnings ratio (PERs) among rubber glove companies (see table). Perhaps this could be partly due to company-specific factors. In the case of Supermax, it is still recovering from the financial burden arising from its failed investment in APL Industries Bhd, though it would appear that the company is on the road to recovery. In the case of Adventa, it is not a very well covered rubber glove company and its strong operating profits may be masked by its one-off foreign exchange losses. Kimberly-Clarke, which markets a wide range of consumer and disposable products globally under its own brand, is trading on a prospective PER of 13.5 times while both Supermax and Adventa are trading on PERs significantly below 10 times despite faster earnings growth. Branding has ensured better margins for Supermax’s and Adventa’s gloves sold under their own brands. The challenge is to enhance their brands and boost sales in the face of competition from multinationals. If they are successful, the potential earnings growth could be tremendous as they are starting from a lower base compared with the near-stagnant sales of multinationals such as Kimberly-Clarke.

Extracted from http://yangyang-yyyynyanggmailcom.blogspot.com