Highlight Glove firms to face margin squeeze

Highlight Glove firms to face margin squeeze
Business & Markets 2014
Written by Ben Shane Lim of theedgemalaysia.com
Thursday, 06 March 2014 09:09

KUALA LUMPUR: Glovemakers have been enjoying relatively high profit margins, especially with nitrile gloves which command better margins than natural rubber gloves. But with a huge influx of nitrile glove capacity in the pipeline, coupled with rising cost pressures, glovemakers are expected to face margin compression.

“This year will be a challenging year in terms of managing costs pressures as well as selling price pressures. We are enjoying margins of about 15% to 16%, but with the incoming capacity and rising costs I expect to see margins coming down to about 9% to 11%,” said Supermax Corp Bhd executive chairman and group managing director Datuk Seri Stanley Thai in an interview with The Edge Financial Daily.

The country’s big four glove- makers — Supermax, Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries have been aggressively expanding their nitrile glove production in recent years. Combined, nitrile glove capacity is projected to grow by 13 billion pieces by the end of this year, up 47% from 37.9 billion pieces currently.

The bulk of the capacity expansion is being led by Supermax and Kossan. Supermax alone is more than doubling its nitrile capacity to 12.3 billion pieces by year-end when its two new production lines come online.

And Malaysian glove makers are not the only ones expanding, said Thai.

Chinese, Thai and Indonesian glove makers are also bumping up capacity to take advantage of the good nitrile glove margins, he added.

“There will come to a point where there will be an oversupply of nitrile gloves and high margin nitrile gloves will become a thing of the past,” Thai said.

Glove makers with the highest margin and selling price will be the hardest hit, predicts Thai, noting that some of his competitors have booked margins in excess of 20%.

“With the increased capacity, customers won’t pay that price anymore. They might pay a small premium but it won’t be as big as before,” he added.

Nonetheless, Thai expects demand for nitrile gloves to continue to be strong, which would help to offset any margin compression.

“As long as latex prices continue to be volatile, there will be strong demand for nitrile gloves,” he said.

Thai, meanwhile, sees Supermax and rival Top Glove being better insulated from an oversupply situation given their wider customer base.

“The rest may have a smaller customer base, but their purchases are big. However, these customers can’t keep paying big premiums.

“I expect to see these big customers slicing off some of their procurement to other manufacturers,” said Thai.

While the recent electricity tariff hike has a minimal impact on the earnings growth of rubber glove makers, Thai said it is still negative.

“The electricity tariff hike has increased our cost per 1,000 gloves by 15 sen to 30 sen depending on the grades of the gloves. Compare that to the overall (production) cost of about RM25 per 1,000 gloves and it is not that high.

“But it still has a negative impact on our bottomline,” said Thai, noting that utility costs which include gas, electricity and water only accounted for 6% to 7% of total costs.

There are also concerns that gas costs for glove makers would pick up. Glove makers currently enjoy subsidised gas prices, but with the government’s subsidy rationalisation underway, the amount of subsidy glove makers enjoy could go down.

Thai warned that a rising cost environment will reduce the competitiveness of Malaysian glove makers compared with other countries, noted Thai.

In addition, the ringgit has been relatively resilient against the US dollar, especially compared with the Thai baht and Indonesian rupiah, further reducing the relative advantage of Malaysian glove makers, he added.

On the bright side, global demand for gloves is expected to pick up ahead on a stronger global economy, especially in the US and Europe.

Going ahead, Thai anticipates a challenging but profitable year for Supermax with a stronger performance in the second half.

Based on yesterday’s closing price of RM2.85, Supermax is still the cheapest glove maker based on its price earnings ratio of 15.05 times. In comparison, Top Glove was valued at 19.06 times, Kossan at 20.28 times, and Hartalega at 20.4 times earnings.



This article first appeared in The Edge Financial Daily, on March 06, 2014.