KUCHING: Demand for rubber gloves continues rising with growth coming from existing traditional buyers for medical and healthcare usage.CIMB Investment Bank Bhd (CIMB Investment) expected the sector’s earnings to jump by 66.5 per cent. This was attributed to new users from emerging countries and other sectors such as nursing home, beauty and other general purposes.
Across the board, glove manufacturers were well prepared for the additional demand as they were expanding their capacity in a big way, added the research firm.
On top of capacity expansion rubber glove manufacturers were using technology to maintain their competitive edge. This included producing better quality gloves and improving manufacturing technology.
For example, Latexx Partners Bhd (Latexx) recently teamed up with a Dutch company Budev BV to produce protein-free gloves that were currently not available in the market. Contributions from this new technology were expected to come in as early as the fourth quarter of this year.
The research firm believed that there would be more technological advances this year as more and more companies focused on their research and development (R&D) programmes.
By moving ahead with technology and automation, the companies would be able to improve quality and overall efficiency, which would lower costs and improve margins in the longer term.
However, the stellar performance of rubber glove companies had stirred fears of a repeat of the 2008 collapse of their share prices, which was caused by a massive sell-down by investors who assumed that record latex prices, high energy prices and a weakening US$ would result losses for glove makers for that year.
CIMB Investment did not think this situation would recur as glove manufacturers proved their resilience against the global economic turmoil in 2008-2009 and earnings continued to rise despite the weakening US$ and high costs.
Rubber gloves proved to be a necessity, especially for the medical sector as they provide a barrier of protection against diseases for medical practitioners. On average, the total net profit for rubber glove companies increased by 19.5 per cent in financial year 2008 and 65.3 per cent last year.
Another concern that most investors would have was the negative impact on rubber glove manufacturers if the government raised electricity tariffs and natural gas prices this year.
Currently, CIMB Investment’s power analyst was firm that economic conditions were not conducive for a hike in electricity and gas rates given that gas as well as coal prices were relatively stable in the second half of last year and the local economy was only starting to regain its footing.
Even if energy costs were raised, the glove makers could pass on the cost to customers within two months, going by experience in 2008 when energy prices were raised and in 2009 when electricity tariffs and natural gas rates were reduced.
Nevertheless, the margins of rubber glove manufacturers improved throughout 2009 including market leader, Top Glove Corporation Bhd (Top Glove), whose margins had held steady year-to-date (YTD). The research firm believed that margins would remain stable for the rest of this year due to the strong demand and the adjustment of glove prices for the preceding month’s average exchange rate and latex prices.
CIMB Investment also highlighted the possibility of margin expansion from greater cooperation between the players, improvements in product specifications and the sale of more gloves on an OBM (own brand manufacturer) basis.
Looking at performance, rubber glove stocks were still favoured by investors for their superior growth prospects and defensiveness. Since the last review by the research firm in January, the sector had gained 26 per cent on average against a meagre gain of one per cent for the Kuala Lumpur Composite Index (KLCI).
Although Kossan Rubber Industries Bhd (Kossan) was the laggard among all the rubber glove stocks last year, the stock was catching up, rising 35 per cent YTD followed by Supermax Corporation Bhd (Supermax) which gained 35.7 per cent. Kossan currently offers the cheapest valuations in the sector and was one of the stocks of choice for investors who missed the sector run last year, the research firm revealed.
Out of the six rubber glove companies that CIMB Investment covered, three companies, namely Adventa Bhd (Adventa), Latexx and Supermax, met its expectations.
Adventa proved that this year was the beginning of a new financial year for the company as it recorded core net profit growth of almost 20 per cent quarter-on-quarter (q-o-q) and 25 per cent year-on-year (y-o-y) in the first quarter of this year.
Moreover, no foreign exchange (forex) losses were incurred during the first half of this year, which was in line with the company’s earlier indication that it would steer clear of long-term foreign hedging contracts from this year onwards.
Record quarterly profits were chalked up by Latexx whose fourth quarter of last year core net profit advanced 157 per cent y-o-y and Supermax, which racked up 171 per cent core net profit growth after a dismal fourth quarter 2008 when it had to make a RM16.7 million write-off for its investment in APLI.
On an annualised basis, the other three companies; Hartalega Holdings Bhd (Hartalega), Kossan and Top Glove exceeded the research firm’s numbers by two to nine per cent. Most of the deviation came from higher than expected sales as well as margins.
Although Hartalega did not add any production lines during the quarter under review, an improvement in productivity from 29,000 pieces of nitrile gloves per hour to 31,500 pieces allowed the group to increase its sales.
As for Kossan, despite two fire incidents and forex losses, the group managed to report higher core net profit, courtesy of a better product mix, which widened the company’s margin.
Meanwhile, industry leader Top Glove turned in a second quarter of this year core net profit that was almost double than the second quarter of last year.
Overall, prospects for the rubber glove sector remained healthy as demand for rubber gloves was still set to rise, especially with the increasing awareness of hygiene and the emergence of new users from developing economies.
The results announcement during January to March this year proved that the rubber glove sector was a resilient sector. Earnings were still set to rise given the strong demand for rubber gloves and the ongoing capacity expansion.
Based on the 2010 general outlook, CIMB Investment continued to favour Adventa for its niche in surgical glove and aggressive long-term plans to expand its other business segments and become a significant supplier of healthcare products in the region.
The company expected its sales to increase progressively this year as the new capacity from the new high-output factory in Kluang and new lines from its Kota Bahru plant would allow it to handle more orders.
On top of that, the utilisation rate for its Uruguay plant had rocketed from 20 per cent to 60 per cent. It expected this plant to start making positive earnings contributions in the third quarter of financial year 2010. The research firm maintained its target price on Adventa at a fair value of RM5.44 per share.
Supermax also stayed as one of CIMB Investment top picks due to its strong position in OBM gloves and the stock’s high liquidity. Its expansion plan were progressing as scheduled, taking its annual production capacity progressed from 14.5 billion pieces currently to 21.7 billion pieces by the end of next year.
The research firm believed Supermax’s prospects would continue to improve and demand for the company’s products would stay strong over the next few quarters. CIMB Investment maintained target price for Supermax at a fair value of RM9.65 per share.