Malaysia rubber glove sector has outperformed the KLCI by 48% YTD

by **Cals** Fri 21 Aug 2015, 10:37

Malaysia rubber glove sector has outperformed the KLCI by 48% YTD
21 Aug 15

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Macquarie Equities Research (MER) released a report on the 18th of August 2015 highlighting the currency impact on the glove sector. Excerpts of the report, titled ‘Weak ringgit to drive further re-rating’ can be found below…

Code	Name	Type	Expiry	Exercise Price
7106C1	SUPERMX-C1	CALL	01 Dec 15	2.25
7153CI	KOSSAN-CI	CALL	29 Jan 16	7.00

Event

The Malaysia rubber glove sector has outperformed the FBMKLCI by 48% YTD, and the sector is now trading close to 2 standard deviations above its mean forward price earnings ratio (PER). MER believes that share prices will continue to be driven by the USD thematic trade for at least the next 6 months, as MER expects the USD/MYR to stay around RM4.12-RM4.15/US$ for the remainder of the year.

Top Glove continues to be MER’s top pick for the sector with an Outperform recommendation, followed by Hartalega, which MER has upgraded to a Neutral recommendation, while maintaining a Neutral call on Supermax.

Impact

Top Glove – it’s been a long time

Earnings delivery will be the main driver for the stock, as its good turnaround story—after its poor track record in 2013-14—will convince investors only gradually. In the recent 2 quarters, the company has managed to turn things around: margins have expanded as it reaped the benefits of enhanced automation and earnings growth from the newly installed capacity. MER believes there is room for further margin improvement, as the company is increasing its nitrile sales mix and maintaining focus on capturing more MNC orders. MER has maintained Top Glove as an Outperform, and raised the TP from RM6.80 to RM8.50 based on 20x FY16E PER.

Hartalega – fairly priced-in for the future

Hartalega has the best track record for the past 2-3 years among the rubber glove manufacturers, in MER’s view, and hence MER accorded it a premium valuation relative to its peers. However, MER believes the current share price has fairly valued the potential upside from the NGC project, and believe there is also limited upside to what MER sees as lofty consensus expectation. Despite missing consensus expectation in FY15 by more than 10%, the stock price remains relatively firm. MER believes the longer-term outlook for the stock is robust. MER has upgraded the stock to Neutral and raise the target price from RM5.93 to RM8.40, based on 23x FY17E PER.

Supermax – the focus remains unclear

Earnings expectations on the stock are low and could possibly surprise on the upside, but the lack of clarity on management focus/strategy remains a concern to MER. The current delays to its expansion plan have already created more uncertainty over its ambitious expansion targets; capacity growth has remained stalled at less than 5% for the past 3 years. The new contact-lenses business is also likely to be a drag on earnings for the first few years. MER maintains a Neutral recommendation with an unchanged TP of RM1.95 based on 10x CY16E PER.

Outlook

Top Glove continues to be MER’s top pick for the sector, as MER believes fundamentally there is still upside to the business, which could help close the valuation discount against its peers.

MER also believes that in the event that the USD thematic trades unwind, Top Glove will be the least impacted as the recent run-up in share price is supported by improving company fundamentals.