Affin Research cuts earnings outlook for glove makers

KUALA LUMPUR: Affin Investment Bank Research has downgraded the earnings forecasts for Malaysian glove makers by up to 21% as higher energy costs and high latex prices would continue to weigh.

It said on Thursday, June 9 that after last week’s 7% to 28% increase in natural gas tariffs, the glove makers were expected to pass through the higher costs to the customers via higher average selling prices (ASPs).

“We estimate that to offset the entire 7% increase in the natural gas tariff, ASPs would have to rise by about 1%,” it said, adding the impact on earnings would be seen from time lags in cost pass through.

Affin IB Research said its talks with management also revealed that the earnings recovery would likely be later than initially expected. The slower-than-expected recovery would be due a higher gas tariff and time lags in cost-pass through, both with respect to the stubbornly high latex prices (currently at RM9.41/kg) and the higher natural gas costs.

“Given that order lead time for glove manufacturers is between 45-60 days, we believe impact of the tariff hike will be seen in the 2QCY11 results,” it said.

Affin IB Research said after taking into account the factors, it was downgrading its FY11-13 net earnings forecasts for Top Glove, Supermax, Kossan and Hartalega by up to 21%.

“Accordingly, we are lowering our target prices for Supermax to RM4.85 (previously, RM5.67), Top Glove to RM4.62 (from RM4.92), Kossan to RM4.39 (previously, RM4.78) and Hartalega to RM7.33 (previously, RM7.46).

“Notwithstanding the lower TPs, there are no changes to our ratings. Supermax, Kossan and Hartalega are still rated as BUY, while Top Glove remains as a REDUCE,” it said.

In spite of our earnings downgrade, it remained OVERWEIGHT on the rubber glove sector, as demand fundamentals remain sound. As a basic medical necessity, demand for gloves will continue to grow at the typical annual pace of 8%-10%, in tandem with growing global healthcare awareness.

“We also expect demand for nitrile gloves to grow at a faster pace, as high latex prices and, consequently, higher ASPs induce a stronger shift in demand to synthetic gloves. Thus, our top picks for the sector are Hartalega and Kossan,” it said.