Rubber Gloves - 2015 will be a better year
Recommendation: Over Weight
2014 was a not a particularly auspicious year for the sector as higher capacity resulted in pricing pressures and weaker earnings. While competition may be even more intense in 2015, its impact on margins will likely be cushioned by the strengthening USD and falling crude oil prices. In line with the brighter outlook, we upgrade our sector rating from a Neutral to an Overweight, with Kossan as our top pick. We increase our earnings forecasts to factor in the stronger USD vs the MYR and potentially lower raw material prices. We upgrade our calls on Hartalega (now pegged to 2-year historical P/E of 21x CY16 P/E vs. a 10% premium over our target market P/E prev.), and Top Glove (from 14.6x to 16.8x CY16 P/E, a 20% discount to Hartalega) from Hold to Add, and keep Supermax (from 12.4x to 12.6x CY16 P/E, a 40% discount to Hartalega) at Hold and Kossan (from 16.4x to 18.9x CY16 P/E, a 10% disc. to Hartalega) at Add. Kossan remains as our top pick.
We increase our earnings forecasts to factor in the stronger USD vs the MYR and potentially lower raw material prices. We upgrade our calls on Hartalega (now pegged to 2-year historical P/E of 21x CY16 P/E vs. a 10% premium over our target market P/E prev.), and Top Glove (from 14.6x to 16.8x CY16 P/E, a 20% discount to Hartalega) from Hold to Add, and keep Supermax (from 12.4x to 12.6x CY16 P/E, a 40% discount to Hartalega) at Hold and Kossan (from 16.4x to 18.9x CY16 P/E, a 10% disc. to Hartalega) at Add. Kossan remains as our top pick.
2014 was a less rosy year
In 2014, we downgraded the sector from an Overweight to a Neutral as we expected the higher capacity to lead to pricing pressures. Indeed, all rubber glove players (except Kossan) reported weaker earnings over the past three quarters, impacted by both pricing pressure and higher operating costs as the government cut subsidies. Given the weaker earnings, the sector’s share prices performed poorly in 2Q2014. Although Kossan and Hartalega recovered subsequently due to their strong fundamentals (Kossan continued to deliver its earnings while Hartalega commands strong margins), the share prices of Top Glove and Supermax remained weak.
2015 will be a better year
While we still maintain our view that the sector will see fiercer competition as more new capacity comes onstream, the pricing pressure will now be partially alleviated by the stronger USD and falling crude oil prices which could lead to lower raw material prices. In addition, the uncertainties from possibly higher electricity tariff and gas prices are temporarily removed as the government has postponed the hikes for now. The companies are also expected to return to earnings growth in FY15 from earnings contractions in FY14, driven by capacity expansion. These catalysts will definitely spur buying interest, especially when the market is volatile with investors switching to defensive sectors like the rubber glove sector.
Source: CIMB Daybreak - 26 January 2015
Recommendation: Over Weight
2014 was a not a particularly auspicious year for the sector as higher capacity resulted in pricing pressures and weaker earnings. While competition may be even more intense in 2015, its impact on margins will likely be cushioned by the strengthening USD and falling crude oil prices. In line with the brighter outlook, we upgrade our sector rating from a Neutral to an Overweight, with Kossan as our top pick. We increase our earnings forecasts to factor in the stronger USD vs the MYR and potentially lower raw material prices. We upgrade our calls on Hartalega (now pegged to 2-year historical P/E of 21x CY16 P/E vs. a 10% premium over our target market P/E prev.), and Top Glove (from 14.6x to 16.8x CY16 P/E, a 20% discount to Hartalega) from Hold to Add, and keep Supermax (from 12.4x to 12.6x CY16 P/E, a 40% discount to Hartalega) at Hold and Kossan (from 16.4x to 18.9x CY16 P/E, a 10% disc. to Hartalega) at Add. Kossan remains as our top pick.
We increase our earnings forecasts to factor in the stronger USD vs the MYR and potentially lower raw material prices. We upgrade our calls on Hartalega (now pegged to 2-year historical P/E of 21x CY16 P/E vs. a 10% premium over our target market P/E prev.), and Top Glove (from 14.6x to 16.8x CY16 P/E, a 20% discount to Hartalega) from Hold to Add, and keep Supermax (from 12.4x to 12.6x CY16 P/E, a 40% discount to Hartalega) at Hold and Kossan (from 16.4x to 18.9x CY16 P/E, a 10% disc. to Hartalega) at Add. Kossan remains as our top pick.
2014 was a less rosy year
In 2014, we downgraded the sector from an Overweight to a Neutral as we expected the higher capacity to lead to pricing pressures. Indeed, all rubber glove players (except Kossan) reported weaker earnings over the past three quarters, impacted by both pricing pressure and higher operating costs as the government cut subsidies. Given the weaker earnings, the sector’s share prices performed poorly in 2Q2014. Although Kossan and Hartalega recovered subsequently due to their strong fundamentals (Kossan continued to deliver its earnings while Hartalega commands strong margins), the share prices of Top Glove and Supermax remained weak.
2015 will be a better year
While we still maintain our view that the sector will see fiercer competition as more new capacity comes onstream, the pricing pressure will now be partially alleviated by the stronger USD and falling crude oil prices which could lead to lower raw material prices. In addition, the uncertainties from possibly higher electricity tariff and gas prices are temporarily removed as the government has postponed the hikes for now. The companies are also expected to return to earnings growth in FY15 from earnings contractions in FY14, driven by capacity expansion. These catalysts will definitely spur buying interest, especially when the market is volatile with investors switching to defensive sectors like the rubber glove sector.
Source: CIMB Daybreak - 26 January 2015
