Maybank IB upgrades glove sector to “overweight” after fall in latex price

by **Cals** Thu 16 Jan 2014, 17:39

Business & Markets 2014

Written by Jonathan Gan at theedgemalaysia.com

Thursday, 16 January 2014 12:10

KUALA LUMPUR (Jan 16): Maybank Investment Bank Research has upgraded the glove sector to “overweight” rating from “neutral” following a recent drop in latex prices.

In a note today, the research house said latex prices have fallen 12% year-to-date to RM4.75 per kg, due to rising supply and the Thai government’s preoccupation with political turmoil at home.

“Top Glove is looking attractive as it is the biggest beneficiary of the falling latex price, with the bulk of its sales derived from the latex glove segment.

“Its share price has declined 15% over the past five months on softer demand for latex gloves but has yet to reflect the latest plunge in latex cost for the company,” commented Maybank IB’s analyst Lee Yen Ling.

The research house has upgraded its rating to “buy” for Top Glove with an unchanged target price (TP) of RM6.2.

“The stock is now trading at 15 times 2014 price earnings ratio (PER), below its historical mean of 17 times and its peers forward PERs,” added Lee.

“We maintain our earnings forecasts for now, a sustainably low latex price would trigger earnings upgrade from us and potentially across the street”

Lee also reiterated “buy” on Kossan (TP: RM4.5) and “hold” on Hartalega (TP RM7.1).

The research house believes that the sector will likely see another energy cost hike in 2014 from gas tariffs but believes that the glove makers would be able to pass on the cost to customers, given this is an industry wide cost inflation.

“Given that the gas bills account for 5-9% of glove maker’s production costs and assuming a RM3/mmbtu gas hike, we estimate the adverse impact on the bottom line will be only 2%,” says Lee.