Analysis Maybank downgrades glove sector

by **Cals** Tue 24 Sep 2013, 12:48

Analysis Maybank downgrades glove sector
Business & Markets 2013
Written by Chong Jin Hun of theedgemalaysia.com
Tuesday, 24 September 2013 11:40

KUALA LUMPUR (Sept 24): Maybank Investment Bank Bhd has downgraded the Malaysian rubber glove sector to “neutral” on higher valuations. This compares to the “overweight” call previously.

In a note today, Maybank analyst Lee Yen Ling said valuations for shares of glove manufacturers in price-earnings ratio (PER) terms, have increased from the eight to 16-time range as at end 2012 to the current 11 to 19 times.

Lee said the PER rise came on a "positive operating environment and superior financials".

"Valuations are fairly reflective of fundamentals at this stage and thus we are downgrading the sector to "neutral" from "overweight”, “ Lee said.

While new supply of gloves looks aggressive, Lee said Maybank expects near-term price war to be mild. This is in anticipation that new capacity will match demand for the product.

"In addition to organic demand growth, nitrile glove sales are also driven by a shift in customer preference from latex powder-free to nitrile gloves.

"Nitrile glove margins remain superior to those of latex gloves, by >6ppts, due to higher pricing and lower raw material cost," Lee said.

Top Glove downgraded, Kossan upgraded
Maybank has also downgraded Top Glove Corp Bhd. Lee said the research firm has cut its earnings per share (EPS) forecast for Top Glove by 5% during financial year ended August 31, 2013 (FY13), and the current year (FY14).

The lower EPS forecast assumes lower sales volume growth. Top Glove is scheduled to announce its FY13 results this October 11.

"As a result, we downgrade Top Glove to "hold" with lower TP (target price) of MYR6.40 (-5%) based on an unchanged 17x 2014 PER," Lee said.

KOSSAN RUBBER INDUSTRIES BHD [] however saw a 7% TP upgrade to RM7.60 with an unchanged "buy" call.

Lee said catalysts for Kossan include its capacity expansion, strong nitrile glove sales volume, and falling rubber prices.

Meanwhile, nitrile-glove centric HARTALEGA HOLDINGS BHD [] is seen expanding into the dental and surgical glove segments starting next year.

Lee said these segments have strong demand, and offer higher profit margins. Maybank has maintained its earnings forecast, TP of RM6.71 and "hold" rating for Hartalega.

"We believe Hartalega’s near-term growth will be limited by its capacity constraint (new capacity to commence in 2015)," Lee said.