Tuesday, September 28

Rubber gloves sector growth to slow down but remain resilient


Earnings growth in the rubber gloves sector are expected to slow down but remain resilient as the demand-supply dynamics in the industry normalises. — Reuters photo

KUCHING: Earnings growth in the rubber gloves sector are expected to slow down but remain resilient as the demand-supply dynamics in the industry normalises.

“Given the recovery in vinyl glove supply from China, glove players’ forward orders are now lower from 60 to 70 days previously to 30 to 45 days, hence we expect earnings growth to slow down,” the research team at Public Investment Bank Bhd (PublicInvest Research) said in a report.

It noted that coupled with the three largest rubber glove companies (Hartalega Holdings Bhd, Top Glove Corporation Bhd and Kossan Rubber Industries Bhd) in Malaysia expanding their capacities by a cumulative circa 11 per cent compounded annual growth rate (CAGR) over the next two years (2018 to 2020), it switch our valuation methodology to price earnings ratio-based from discounted cash flow (DCF) to better reflect the changes in industry dynamics and respective growth prospects of the companies.

It believed that the previous disruption in vinyl glove supply in China has already normalised, with the glove players’ forward orders lower from 60 to 70 days to 30 to 45 days currently.

“In line with the tapering forward orders, Hartalega has deferred its expansion plan for Plant 6 and 7 to commission the first line in May and October 2019 respectively (from January and March 2019).

“In addition, it also plans to commission two lines every quarter for these new two plants, which are much slower as compared to previous’ plant commissioning of two lines every month,” PublicInvest Research added.

While earnings growth are expected to slow down, the research team pointed out that the sector’s growth remained resilient.

“Top Glove’s recent released 4QFY18 (June to August) earnings grew at smaller rate of 3.0 per cent y-o-y and declined 13.6 per cent quarter-on-quarter (q-o-q), despite strong revenue growth of 34.8 per cent y-o-y and 10.6 per cent q-o-q.

“This was largely due to higher tax expenses as the tax incentives in FY18 were taken up over the four quarters (compared with FY17 tax incentives that were taken up only in 4QFY17).

“The group’s strong revenue growth in FY18 was mainly from developing regions that are mainly natural rubber glove users. Hartalega and Kossan will be releasing their 3QCY18 (July toSeptember) results today and on 16th November respectively.

“We expect the glove players’ earnings growth to slow down on the back of the recovery in vinyl glove supply from China,” the research team projected.

As for the prospects of raised minimum wages, PublicInvest Research believed that the cost pressure should be manageable.

“The government has announced a minimum wage hike to RM1,100 from RM1,000 effective January 1, 2019. Assuming all other costs remain constant, the minimum wage hike represents less than 1one per cent increase in the total manufacturing costs.

“The impact should be minimal to the glove players as the higher labour cost is expected to be offset by strengthening of the US dollar against the ringgit, and the low raw material costs.

“Currently, natural rubber prices remain soft at circa RM3.90 to RM4 amid oversupply and we expect the price to be range bound at these levels. While nitrile butadiene prices have been on an uptrend since early this year due to rising crude oil prices, the trend has reversed since September,” it explained.

Meanwhile, it also noted that there is a risk of overcapacity in the industry, depending on the pace of the glove players commissioning their production lines after the completion of factory construction.

“That said, the risk should be manageable and mitigated by the slowing down in expansion plans in order to match market demand,” it added.

All in, PublicInvest Research said, despite the resilient demand, it maintained its ‘neutral’ call on the sector as it believed growth has already been priced-in at current levels.