Worst is likely over for rubber glovemakers

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KUCHING: Despite the weak set of results for the second quarter of 2019 (2Q19), analysts believe that the worst is likely over for the rubber glove sector.

Affin Hwang Investment Bank Bhd’s research arm (AffinHwang Capital) in a sector update
saw that the overall sector earnings for the 2Q19 fell short of both consensus and its expectations.

“However, we believe that the worst is over and growth is likely to resume in the coming quarters, as glove manufacturers have indicated that they have started to increase selling prices to pass on the incremental costs.”

Similar to 1Q19, it noted that the rubber glove sector earnings in 2Q19 contracted by 11.5 per cent year-on-year (y-o-y), as both Hartalega Holdings Bhd (Hartalega) and Top Glove Corporation Bhd (Top Glove) continued to record y-o-y declines in profit for the quarter.

“The performance in the first six months of 2019 (6M19) was less than satisfactory, as earnings fell short of both the market and our expectations, delivering only 40 per cent of both consensus and our full-year forecasts.

“The miss was attributed to lower sales volume (Hartalega) and margin compression for its latex glove product (Top Glove). Post-revisions, we are forecasting a 6.7 per cent y-o-y sector earnings growth in 2019,” it said.

Both Top Glove and Supermax Corporation Bhd (Supermax) have attributed their weak set of results to the rising raw material (latex) cost, which they did not manage to pass on fully during the quarter.

“We believe there are a few challenges limiting their ability to raise their selling price, namely the value perception between latex gloves and nitrile gloves, overcapacity in the latex glove space and the time lag in price-setting (around 30 to 45 days).

“However, as latex prices have fallen by 13 per cent since the peak in 2Q19, the need to raise selling prices further have eased,” it added.

“Malaysia manufacturers are acting more rationally to prevent an all-out price war, as they are willing to delay or cut capacity to maintain selling prices. Kossan Rubber Industries Bhd (Kossan) has carried out a major revamp and upgrading works during the quarter, which led to a five to seven per cent reduction in its capacity.

“Other manufacturers like Top Glove and Hartalega have also delayed some of their expansion.

“We believe that weaker demand for gloves from Malaysia was partly due to an increase in China glove imports into the US, as buyers stock up in anticipation of the tariff hike,” AffinHwang Capital said.

As the US-China trade tension intensifies, the ringgit has weakened against the US$ to 4.2203 currently from 4.1940 in May 2019.

“If the ringgit continues to weaken from current levels, margins for rubber glove manufacturers will no doubt benefit.

“Based on our estimates, for every one per cent depreciation in the ringgit, net profit will increase by 0.3 to 0.8 per cent in 2019E, and vice versa, for the glove manufacturers in our universe,” it added.

All in, AffinHwang Capital pegged a ‘neutral’ rating on the sector.