Bursa Malaysia Stock Watch
Rubber Glove
kltrader
Publish date: Wed, 30 Dec 2009, 09:46 PM
kltrader
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Rubber Glove: "♦ Yoy growth in value. Last year, Malaysia’s export of rubber gloves reached an all-time high of RM6.8bn (+20% yoy) due to stronger US$ and sustained demand from US and Europe. As for 2009, for the period between Jan-Mar, Malaysia’s export for rubber gloves reached RM1.7bn (+12.4% yoy). The US continued to be the largest single buyer of Malaysian gloves, accounting for 39.3% of Malaysia’s total glove exports for the period between Jan-Mar.
♦ Demand to stay resilient. We expect demand for gloves to remain strong as the possibility of more H1N1- type flu outbreaks in the future is another catalyst for demand. Given that gloves are the most basic and affordable form of protection against viruses in the healthcare industry and coupled with the rising awareness in healthcare standard for the populated countries (e.g. China and India), should translate into a further boost in demand for medical gloves moving forward.
♦ … but not without some headwinds. While demand prospects remain favourable, some headwinds appear to
be developing. Latex prices are currently trending upwards (YTD=+69.6%). However, given that most of the glove manufacturers practice an efficient costing/pricing mechanism, using the average latex price for the previous month to set the current month’s selling price. This enables the glove manufacturers to pass on the higher latex cost to customers, albeit with a slight time lag. As for the volatility of the US$ against RM, past trends suggest that glove manufacturers have the ability to adjust their prices, for currency effect normally 1-2 months later. Any time lag in passing on the cost increase, however, would be mildly negative but
not significant.
♦ Risks. The risks include: 1) sharp surge in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; 2) an appreciating RM against the US$; and 3) execution risk from capacity expansion.
♦ No change to our net profit forecasts. No change to our earnings forecasts for now.
Valuations and Recommendation
♦ Top Glove – maintaining its position as world’s largest glove producer. We continue to like Top Glove (Outperform, FV=RM11.60) for its position as world’s largest glove producer. Top Glove’s annual production capacity is expected to reach 35.3bn pieces by end-FY10, from 31.5bn pieces currently following the completion of its two new factories as well as additional eight new lines at F18. The extra capacity is to support the strong orders that are coming from Latin America and Europe following the possibility of more H1N1-type flu outbreaks in the future. With its healthy cash pile of RM222.0m (14.5 sen/share) as at end-Nov, Top Glove remains on the lookout for potential acquisitions. Given its healthy cash pile of RM237.1m as at end-Nov, we believe the company would not have too much problems with financing its future acquisitions internally. Our fair value is based on CY10 target PER of 15x.
♦ Kossan – laggard amongst its peers. We believe Kossan’s (Outperform, FV=RM8.65) lagging performance vs. peers for the YTD was due to its poor performance in its TRP segment earlier this year, unfavourable hedging
policies and two fire incidents. Operation-wise, it remains business as usual for Kossan. Kossan plans to increase its current annual production capacity of 11.1bn pieces to 14.5bn pieces by end-2010 and further to 18bn pieces by end-2011. Kossan is currently trading at CY10 PER of 6.5x, which, in our view is undemanding given FY08-11 net profit CAGR of 37.1%. Coupled with the recovery in the demand for its TRP products on the back of recovering economy in 2010 and resilient demand for medical gloves, should bode well for Kossan. Our fair value is based on CY10 target PER of 11x.
♦ Adventa – largest surgical glove producer in Malaysia. We continue to favour Adventa (Outperform, FV=RM3.48) for its niche position as the largest surgical glove producer in Malaysia. The management is looking to aggressively expand its surgical gloves production from 250m pairs currently to 350m pairs by early 2010 and 450m pairs by end-2011. In addition, the company plans to ramp up its dental and examination gloves by building a new factory in Kluang, Johor, which will house 7 double former lines (+1.5 bn pieces). The commercial production for the new factory is expected to start by 2Q-2010, which will increase the current annual production capacity of 3bn pieces to 4.5bn pieces by end-2010. In 2011, the management plans to add another 5 double former line (+1.0 bn pieces), which will increase Adventa’s annual capacity production for dental and examination gloves to 5.5bn pieces by end-2011. These aggressive capacity expansion plans are steps for the company to take advantage of the rising awareness in hygiene standards following the H1N1 pandemic as well as to further its foothold in Latin America as the company recently gotten the approval to export its gloves to Brazil. We recently upgraded our fair value after revising our target CY10 PER for Adventa to 10x (from 8x).
♦ Market Perform for Hartalega. We like Hartalega for its position as the second largest nitrile glove manufacturer in Malaysia and the second largest in the world. Management has mentioned the construction of
Plant 5 is almost completed and that the commercial production for two new lines at Plant 5 (+0.6 bn pieces) is set to start in Feb ’10. This will increase Hartalega’s annual production capacity to 6.8bn pieces by end-FY10 from 6.2bn pieces currently. Following that, management intends to put in another ten new lines at this plant and decommissioning ten of its old lines in Plant 1 and replacing them with six high-capacity new lines. This would effectively raise Hartalega’s annual production capacity further to 10bn pieces by end-FY12. Management also plans to increase its natural rubber gloves production to 30% of sales vs. 20% currently to take advantage on the growing demand from developing countries (i.e. China and India). However, given the limited potential upside to our fair value, which is based on our expected market returns, we have downgraded our Outperform call to Market Perform while maintaining our fair value of RM6.23 based on unchanged CY10 target PER of 11x.
By RHBInvest
Analyst: David Chong, CFA
"
♦ Demand to stay resilient. We expect demand for gloves to remain strong as the possibility of more H1N1- type flu outbreaks in the future is another catalyst for demand. Given that gloves are the most basic and affordable form of protection against viruses in the healthcare industry and coupled with the rising awareness in healthcare standard for the populated countries (e.g. China and India), should translate into a further boost in demand for medical gloves moving forward.
♦ … but not without some headwinds. While demand prospects remain favourable, some headwinds appear to
be developing. Latex prices are currently trending upwards (YTD=+69.6%). However, given that most of the glove manufacturers practice an efficient costing/pricing mechanism, using the average latex price for the previous month to set the current month’s selling price. This enables the glove manufacturers to pass on the higher latex cost to customers, albeit with a slight time lag. As for the volatility of the US$ against RM, past trends suggest that glove manufacturers have the ability to adjust their prices, for currency effect normally 1-2 months later. Any time lag in passing on the cost increase, however, would be mildly negative but
not significant.
♦ Risks. The risks include: 1) sharp surge in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; 2) an appreciating RM against the US$; and 3) execution risk from capacity expansion.
♦ No change to our net profit forecasts. No change to our earnings forecasts for now.
Valuations and Recommendation
♦ Top Glove – maintaining its position as world’s largest glove producer. We continue to like Top Glove (Outperform, FV=RM11.60) for its position as world’s largest glove producer. Top Glove’s annual production capacity is expected to reach 35.3bn pieces by end-FY10, from 31.5bn pieces currently following the completion of its two new factories as well as additional eight new lines at F18. The extra capacity is to support the strong orders that are coming from Latin America and Europe following the possibility of more H1N1-type flu outbreaks in the future. With its healthy cash pile of RM222.0m (14.5 sen/share) as at end-Nov, Top Glove remains on the lookout for potential acquisitions. Given its healthy cash pile of RM237.1m as at end-Nov, we believe the company would not have too much problems with financing its future acquisitions internally. Our fair value is based on CY10 target PER of 15x.
♦ Kossan – laggard amongst its peers. We believe Kossan’s (Outperform, FV=RM8.65) lagging performance vs. peers for the YTD was due to its poor performance in its TRP segment earlier this year, unfavourable hedging
policies and two fire incidents. Operation-wise, it remains business as usual for Kossan. Kossan plans to increase its current annual production capacity of 11.1bn pieces to 14.5bn pieces by end-2010 and further to 18bn pieces by end-2011. Kossan is currently trading at CY10 PER of 6.5x, which, in our view is undemanding given FY08-11 net profit CAGR of 37.1%. Coupled with the recovery in the demand for its TRP products on the back of recovering economy in 2010 and resilient demand for medical gloves, should bode well for Kossan. Our fair value is based on CY10 target PER of 11x.
♦ Adventa – largest surgical glove producer in Malaysia. We continue to favour Adventa (Outperform, FV=RM3.48) for its niche position as the largest surgical glove producer in Malaysia. The management is looking to aggressively expand its surgical gloves production from 250m pairs currently to 350m pairs by early 2010 and 450m pairs by end-2011. In addition, the company plans to ramp up its dental and examination gloves by building a new factory in Kluang, Johor, which will house 7 double former lines (+1.5 bn pieces). The commercial production for the new factory is expected to start by 2Q-2010, which will increase the current annual production capacity of 3bn pieces to 4.5bn pieces by end-2010. In 2011, the management plans to add another 5 double former line (+1.0 bn pieces), which will increase Adventa’s annual capacity production for dental and examination gloves to 5.5bn pieces by end-2011. These aggressive capacity expansion plans are steps for the company to take advantage of the rising awareness in hygiene standards following the H1N1 pandemic as well as to further its foothold in Latin America as the company recently gotten the approval to export its gloves to Brazil. We recently upgraded our fair value after revising our target CY10 PER for Adventa to 10x (from 8x).
♦ Market Perform for Hartalega. We like Hartalega for its position as the second largest nitrile glove manufacturer in Malaysia and the second largest in the world. Management has mentioned the construction of
Plant 5 is almost completed and that the commercial production for two new lines at Plant 5 (+0.6 bn pieces) is set to start in Feb ’10. This will increase Hartalega’s annual production capacity to 6.8bn pieces by end-FY10 from 6.2bn pieces currently. Following that, management intends to put in another ten new lines at this plant and decommissioning ten of its old lines in Plant 1 and replacing them with six high-capacity new lines. This would effectively raise Hartalega’s annual production capacity further to 10bn pieces by end-FY12. Management also plans to increase its natural rubber gloves production to 30% of sales vs. 20% currently to take advantage on the growing demand from developing countries (i.e. China and India). However, given the limited potential upside to our fair value, which is based on our expected market returns, we have downgraded our Outperform call to Market Perform while maintaining our fair value of RM6.23 based on unchanged CY10 target PER of 11x.
By RHBInvest
Analyst: David Chong, CFA
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