KUCHING: The weakening of the US dollar compared with the ringgit in the fourth quarter of the financial year 2010 (4QFY10) is not good for the rubber glove players because there would be a time lag for them to price the unfavourable movement into their new sales contract.
GOOD NEWS: Yap says the strengthening of the US dollar will be good news for all rubber glove manufacturers since most of their transactions are in US dollars. – Photo by Google Images.
Hence, this had eroded both their top lines and bottom lines.
“However, going forward, our house expects the US dollar to strengthen back against the ringgit although not substantially.
“Nonetheless, it would be good news for all rubber glove manufacturers since most of their transactions were in US dollars,” said Jason Yap, an analyst from OSK Research Sdn Bhd (OSK Research).
Yap noted that during a recent briefing by Top Glove Corporation Bhd (Top Glove), the question of the current high latex price of about RM7.50 per kilogramme (kg) was brought up a couple of times.
“Management did acknowledge that it would be a matter of time before the uptrend in price reverses itself and when it comes, it would likely come in a big wave with the possibility of reversing its gains by RM1 to RM2 per kg as seen historically,” he said.
He pointed out that although this seemed to comfort some of the investors, what was not mentioned was the timing of this reversal.
“In my view, I believe the reversal would likely come during the second half of the calendar year 2011 (2HCY11) rather than in the immediate term.
“This is because I think most rubber glove manufacturers would not have stocked up much on latex supply and hence any latex price drop would present a buying opportunity.
“Else, they may continue to suffer from the high latex price come the first half of the calendar year 2011 (1HCY11) when the rubber trees experience their wintering season resulting in low latex supply.
“In conclusion, I believe the current high latex price would still continue to erode all the rubber glove manufacturers’ margins until probably 2HCY11,” Yap highlighted.
On the reason why there was no 100 per cent latex cost pass through, he believed there were two reasons to this question; firstly, it was due to the normalisation in demand for examination gloves and secondly, their customers would expect the rubber glove manufacturer to bear part of the high latex price since traditionally, they had been bearing this negative impact during the first half (1H) of every year when the price was usually at its highest point.
OSK Research’s target price for Top Glove remained unchanged at RM6.06 per share based on a price earnings ratio of 15 times financial year 2011 (FY11) earnings per share.
Yap also understood that there was possibility of Top Glove delaying its capacity expansion by several months in the event utilisation rate did not recover above 70 per cent.