Stronger ringgit unlikely to jolt glove makers’ earnings

by **Cals** Mon 15 Feb 2016, 20:00

Stronger ringgit unlikely to jolt glove makers’ earnings

By Gho Chee Yuan / The Edge Financial Daily | February 15, 2016 : 9:36 AM MYT

This article first appeared in The Edge Financial Daily, on February 15, 2016.

KUALA LUMPUR: Over the past 12 months, export-oriented counters, particularly the rubber glove makers, have been star performers with the blessing of the stronger US dollar and low commodity prices.

However, the market is on the threshold of a strengthening of the ringgit against the greenback since the revised Budget 2016 was announced. Year to date, the local currency has appreciated 4.13% as opposed to a depreciation of 18.54% recorded in 2015.

HSBC Global Asset Management views that the ringgit is undervalued. “In terms of short-term market performances, both [the] ringgit and Indonesian rupiah could be affected by the volatility of commodity prices. However, on a longer-term basis, we expect some stabilisation and reversal of underperformance of the two currencies,” said HSBC chief investment officer of fixed income for Asia-Pacific Cecilia Chan in a media conference call recently.

Contacted analysts opine that there is no need to ring the alarm, at least for now, although some are expecting the ringgit to regain some strength, believing that the glove manufacturers’ fundamentals remain intact given the rising demand for their products and hedging policies.

“The ringgit appreciation is within expectations and we can’t say this situation is bad for them. Demand for gloves is growing at 6% to 8% a year and they are in expansion mode to capture the rising demand,” said an analyst.

Another analyst noted that the glove makers were already enjoying a good margin at the exchange rate of 3.0 to 3.20 against the greenback.

“When the ringgit was depreciating, glove makers reduced their selling prices in stages, so if [the] ringgit strengthens, they will revise their selling prices in stages.

“As long as there is no high volatility in currency exchange, they should be fine,” said the analyst, who estimates that every 1% appreciation of [the] ringgit shall erode 3% to 4% in net profit, assuming there is no adjustment in selling prices.

Meanwhile, other analysts reckon that every 10% appreciation in the ringgit would affect 3% to 5% of the glove makers’ earnings, if all other factors including production costs and raw material prices are unchanged.

He noted that the sharp increase in the glove makers’ earnings last year was driven by new capacity-led earnings, operation efficiency improvement and favourable foreign exchange.

“The ringgit appreciation indeed will impact their earnings but I don’t think it is as significant as people expect. Please do not forget that they are still expanding in terms of capacity and demand is still strong at this juncture.

“The market has a bigger appetite than their earnings growth. There will still be growth, but the quantum may not be as exciting as last year,” he said, adding that growth will be underpinned by new capacity.

The recent sharp rise in foreign worker levy is expected to affect them. But analysts think otherwise.

“We expect the levy hike to impact the earnings of glove players, albeit marginally,” said MIDF Research in a note last Thursday.

“At this juncture, it is still unclear which party will be responsible for the additional increase in foreign workers’ levy. Pending further confirmation from the government and assuming that employees will continue to bear the new increase in levy, we think this increase will offset the RM100 increase in salary per month from the newly implemented minimum wage policy,” the firm added.

According to MIDF, should employers be made to pay for the additional increase in levy, it will increase the cost for the glove players by 10 sen to 15 sen per 1,000 pieces of gloves, or an RM4 million to RM4.5 million increase in labour cost per annum.

“This in turn will reduce the players’ net profit by 1.5% to 2% per annum,” MIDF said, adding that the players might be passing on the increase in cost to their customers by increasing their selling prices.

Although noting that the majority of the local glove companies employ a significant number of foreign workers for their production lines, CIMB Research believes the impact will be minimal.

“We expect the cost hike to be shared by the foreign workers. We estimate this could reduce 2016 sector profit by about 1% to 2%,” the research firm said.