KUCHING: The rubber gloves sector is expected to be buoyed by solid demand which will further boost the sector’s earnings for the second half of 2017 (2H17), analysts observed.
In a sectoral outlook, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said strong industry 1H17 volume sales are expected to further gain momentum in 2H17.
“Amplifying the earnings growth potential is the strong demand supported by new capacity expansion, re-stocking activities and positive operating environment in the absence of price
competition.
“Exports of rubber gloves in 1H17 recorded a solid volume sales growth of 13 to 15 per cent driven largely by nitrile volume sales (26 to 29 per cent),” the research team opined.
It further expect volume sales to pick up over the next few quarters underpinned by new capacity expansion and restocking activities following the lower raw material price.
“The lower-than-expected sequential volume sales growth could have been due to higher input latex cost and slower-than-expected new capacity expansion.
“The slower-than-expected ramp-up in new capacity which we highlighted a few quarters ago is expected to gradually come onstream in 2H17 and therefore, underpin forward sequential earnings growth.
“Recall that we have over the past three quarters highlighted that potential oversupply concerns appear to have been overplayed considering that capacity expansion plans of the four rubber gloves companies under our coverage are expected to be delayed and staggered,” it added.
In terms of market performance, Kenanga Research expect glove makers to trade at mid-teens to high-teens valuations at least over the medium term in view of the sustained weakness in ringgit against the US dollar.
“Specifically, glove makers have been trading at between 16-folds and 35-folds price earnings ratio (PER) one-year forward valuation,” it added.
“With the ringgit strengthening against the US dollar of late, probably one of the key concerns for investors is whether share prices of glove makers will fall in tandem.
“While there is strong positive correlation between glove stocks and stronger US dollar, that relationship is strongest over the three to five year period.
“However, over the past one year, it appears that the link has weakened (with Kossan and Harta even showing negative correlations), suggesting that these glove stocks might not be purely viewed as currency proxies.
“Moreover, given the strong demand coupled with players judiciously planning their capacity expansion, we expected sustained earnings growth to underpin current valuations,” it explained.
All in, it pegged an ‘overweight’ rating on the rubber gloves sector.
“The stage is set for a solid 2H17 following three quarters of anemic quarterly earnings growth. Amplifying the earnings growth potential is the strong demand being matched by new capacity expansion, re-stocking activities and a positive operating environment,” it highlighted.