Rubber Glove - Neutral - 28 March 2012

Stock Name: KOSSAN
Company Name: KOSSAN RUBBER INDUSTRIES BHD

Research House: KENANGA

Price Call: BUY

Target Price: 3.64

Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD

Research House: KENANGA

Price Call: HOLD

Target Price: 8.32

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: KENANGA

Price Call: HOLD

Target Price: 4.36

Stock Name: SUPERMX
Company Name: SUPERMAX CORPORATION BHD

Research House: KENANGA

Price Call: HOLD

Target Price: 2.06

Stock Name: ADVENTA
Company Name: ADVENTA BHD

Research House: KENANGA

Price Call: SELL

Target Price: 1.41

We are currently NEUTRAL on the sector due to the high latexprice, which is eroding the sector margins. While we are cautious on the latexprice trend, the glove players on the other hand believes that latex priceswill ease back later due to the ample supply of natural rubber. Hence, we mayupgrade the sector later if the price situation improves significantly in theshort term. For now, we are maintaining a Neutral rating on the sector in viewof the current high latex price, which is being supported by the Thaigovernment and a strengthening of RM. For the sector, we have an Outperformcall on Kossan Rubber (TP: RM3.64) and are maintaining our Market Perform callson Hartalega (Market Perform; TP: RM8.32), Top Glove Corporation (Market Perform; TP: RM4.36) and Supermax Corporation(Market Perform; TP: RM2.06). We  retainan Underperform call on Adventa (Under Perform; TP: RM1.41) 

4Q11 results update.  The rubber glove companies' 4Q11 results weremostly in line with expectations with the exception of Topglove, which exceededexpectations and Adventa, which saw its results coming in below expectations.The companies generally recorded flattish quarterly earnings with flat marginsand a small growth in sales QoQ. Topglove however reported a very strong growthduring the quarter (+70% QoQ) with higher margins from 5.7% to 9.7% as itbenefits the most from the positive spread due to the lower latex price.

Stabilizing latexprice? Since the government of Thailand set a minimum price for latex, theprice of latex has surged by more than 11% in the past few months fromRM7.00/kg to a high of RM7.80/kg currently. Although the latex price hasincreased, the glove players still expect natural latex price to ease backlater and  stabilise  in the  long  term as  they  opined that there is no shortage of naturalrubber latex supply and believe that there is an ample supply of natural rubberdue to the additional plantations in neighboring countries like Cambodia andSouth Vietnam. Furthermore, these players expect latex traders to release theirstocks later to unlock their cash flow, and this would suppress the latexprices.

Currency impact.The USD has depreciated c.4% to less than RM3.03/USD from an average ofRM3.15/USD three months ago.  Thestrengthening of Ringgit would have negative impacts to glove makers' bottomlines given that most of their sales are denominated in USD. That said,Thailand, the industry's nearest competitor, is facing even bigger problemsgiven the greater volatility in the Thai Baht compared to Ringgit (by c. 6% in thesame period). Meanwhile, Malaysia has not been losing any competitive advantageto Indonesia as the latter does not have the same production scale and technologydespite its weaker currency exchange against the USD. 

Reducing cost viathinner latex gloves.  We understandthat the glove players are moving to super thin gloves (3.5g), which is similaror in line with nitrile powder free glove. This will reduce the consumption ofnatural rubber latex, which accounts for about 50%-60% of the production cost.Meanwhile, demand growth for gloves remains healthy, allowing glove makers tocontinue being price makers and passing on any cost increases to customers. 

Maintain Neutral.We maintain a Neutral rating on the sector given the current higher latex pricecaused possibly by the artificial support of rubber prices by the Thai,Indonesian and Malaysian governments and the continuing strengthening of RM againstthe USD. We like Kossan Rubber (Outperform; TP: RM3.64)  for its well balanced mix in nitrile andlatex gloves and are maintaining our Market Perform calls on Hartalega (MarketPerform; TP: RM8.32),  Top GloveCorporation (Market Perform; TP: RM4.36) and Supermax Corporation (MarketPerform; TP: RM2.06).  We retain anUnderperform call on Adventa (Under Perform; TP: RM1.41). 

Source: Kenanga