Sector Analysis Kenanga keeps "overweight" on glove sector, upgrades Kossan, Hartalega

by **Cals** Fri 04 Oct 2013, 16:55

Sector Analysis Kenanga keeps "overweight" on glove sector, upgrades Kossan, Hartalega

Business & Markets 2013

Written by Cynthia Blemin of theedgemalaysia.com

Friday, 04 October 2013 14:47

KUALA LUMPUR (Oct 4): Kenanga Research has maintained its "overweight" rating on the Malaysian rubber glove sector. This is despite the rise in rubber glove shares under its coverage so far this year.

In a note today, Kenanga said rubber glove stocks under its coverage had risen by an average of 53%. This was led by KOSSAN RUBBER INDUSTRIES BHD [] which have gained 106%, HARTALEGA HOLDINGS BHD [] (+57%) and Supermax Corp (+37%).

Kenanga said it "believes the sector will remain resilient" and a further re-rating is possible in the fourth quarter of this year.

Factors seen supporting growth in the glove sector include strong demand for the product, weakening ringgit against the US dollar and sustained low raw material prices.

"Generally, a weakening Ringgit is positive for glove makers. Since sales are USD denominated, theoretically, a depreciating ringgit against the dollar will lead to more revenue receipts for glove makers.

"The ringgit has weakened by 9% to RM3.26 from an average of RM2.99 against the dollar over the past several weeks. Ceteris paribus, a 1% depreciation of RM against USD will lead to an average 1%-2% increase in the net profit of rubber glove players," Kenanga said.

The rise in share prices of Kossan, Hartalega and Supermax is in line with Kenanga's "outperform" calls for these companies.

“Our top pick is Kossan with an outperform call and a higher target price (TP) of RM7.86 (RM6.88 previously) based on 16x FY14 EPS (14x previously).

“We think the narrower valuation gap between Kossan compared to both Top Glove and Hartalega is warranted due to its superior net profit growth of 18% and 27% in FY13 and FY14, respectively,” Kenanga said.

Kossan's profit growth compares to an average of 13% each for Top Glove and Hartalega in FY13 and FY14, according to Kenanga.

Apart from Kossan’s improving dividend payouts, Kenanga also noted the firm's potential margin expansion from its new plant.

As for the other glove stocks, Kenanga has retained its "outperform" calls for Hartalega and Supermax. Kenanga which has raised its TP for Hartalega to RM8.13 from RM7.32, has however maintained its RM2.82 fair value for Supermax.

Kenanga has a "market perform" call on Top Glove with a TP of RM6.36.

According to Kenanga, the four rubber glove firms under its coverage reported second quarter results that came in within the research firm's and market expectations.

Kenanga said salesvolume grew strongly year-on-year across the board led by Kossan followed by Hartalega, Supermax and Top Glove. This is due to capacity expansion as well as stronger demand.

Stronger demand was fuelled by lower average selling prices in tandem with easing raw material prices.

Looking ahead, Kenanga foresees that rubber glove players may face higher production cost. This follows the recent increase in fuel prices in line with the government's subsidy-rationalisation programme.

However, the research house is not overly concerned on any potential hike in gas prices since energy cost makes up only 8-9% of glove manufacturers' production cost.