Thursday 28 Mar 2024
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KUALA LUMPUR (Jan 14): Hartalega Holdings Bhd and Kossan Rubber Industries Bhd will have the strongest earnings growth ahead, underpinned by their aggressive expansion strategy, according to Maybank IB Research.

In a note today, the research house said that in terms of new annual capacities in 2015, Top Glove Corporation Bhd would see moderate increment in January (+5% to 45 billion pieces), followed by massive increments from Kossan by Feb (+29% to 22 billion pieces) and Hartalega by Dec (+57% to 22 billion pieces).

Additionally, it notes Riverstone Holdings Ltd will also add 1 billion pieces capacity in 3Q15 (+23% to 5.2 billion pieces), a significant increment relative to its own size.

“As for Supermax Corporation Bhd, its plant expansion has been delayed since 2012 for various reasons and it remains to be seen if it will be completed in 2015,” it said.

Meanwhile, Maybank IB said the glove sector would see increasing competition ahead due to incoming capacities despite mitigating factors of low rubber prices and high US dollar-ringgit.

Although the research house foresees several positive external factors for the sector in 2015, eventually the US dolar gains and cost savings from low rubber prices will likely be passed through given the increasingly competitive environment, but with a time lag.

It said this was despite the nitrile-skewed glove stocks outperforming the FBM KLCI by 20% in 2014 due to their superior earnings growth prospects and the stronger US dollar versus ringgit towards end-2014.

"Glove makers are net beneficiaries of the strong US dollar, as almost all of their sales receipts are USD-denominated while approximately 50% of their production cost is in US dollar.  

"Additionally, given that the fall in NBR (nitrile butadiene rubberprice) price has substantially lagged the decline in latex and butadiene prices, we see more downside to the price of NBR in 2015," it said.

The price of latex may also stay benign in view of weak global demand, it added.

Even as industry’s capacity expansion will be aggressive in 2015 with planned new capacity growth of 17% for Malaysia’s Top 4 producers, Maybank IB believes the new capacity could be absorbed by new demand on an expected global glove demand growth of 7% and higher outsourcing orders from the MNCs which are shutting down plants in Thailand and Malaysia.

"We believe that nitrile glove exports have flattened out due to the capacity constraint of local glove makers (i.e. Hartalega) and Kossan.

"Additionally, Supermax also encountered a fire mishap at its plant in Malacca, which caused some production loss," it said.

Nevertheless, taking cue from the world’s largest glove importer–the US, the research house believes that supply from other countries have not increased significantly and that Malaysia has largely retained its global market share of sub-60%.

This would suggest that global market dynamics were very much dictated by Malaysia where its economies of scale, efficiencies and product quality limit the level of competition from the other countries, it added.

"Among the stocks under our coverage, we expect Hartalega to report the highest 2-year EPS CAGR (2014-16) of 21%, followed by Riverstone (18%), Kossan (15%) and Top Glove (5%), driven by their respective expansion plans.

"Our top pick is Hartalega (unchanged TP RM8.50, 21x 2016 PER), the market leader in nitrile glove segment. We also have Buy calls on Kossan (TP raised to RM5.90 (from MYR5.00) as we roll forward our 19x PER to 2016) and Riverstone (unchanged TP SG$1.20, 15x 2015 PER)," it added.

 

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