Highlight Top Glove, Kossan in spotlight on stronger ringgit, raw material prices

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Top Glove, Kossan in spotlight on stronger ringgit, raw material prices

By Tan Siew Mung / theedgemarkets.com   | April 22, 2016 : 11:18 AM MYT

KUALA LUMPUR (April 22): Top Glove Corp Bhd faces the "highest risk of downside revision to earnings" as Malaysian rubber glove manufacturers contend with costlier raw materials and a stronger ringgit versus the US dollar, CIMB Investment Bank Bhd said.
"Top Glove is at highest risk, assuming these trends continue," CIMB analyst Walter Aw wrote in a note.
Aw said Top Glove had benefited the most from lower raw material prices and a stronger US dollar against the ringgit last year.
At 10:29am today, Top Glove shares rose five sen or 1% to RM5.10 for a market capitalisation of RM6.43 billion. The stock saw 748,500 shares traded.
But from an industry-wide viewpoint, the overall impact on glove makers' earnings is expected to be minimal if raw material prices and the ringgit continue to strengthen.
Aw said this was due to the industry's cost pass-through mechanism, which allows glove manufacturers to adjust the prices of their products based on raw material price movements.
"We believe that the impact on earnings will be minimal because glove players should face no difficulty in raising prices, as it is an industry-wide phenomenon
"Furthermore, glove makers have a cost pass-through mechanism in place, allowing them to pass on the additional costs to their customers in the event of any sharp increases in costs," he said.
CIMB maintained its "overweight" call on the rubber glove sector. Aw said Kossan Rubber Industries Bhd was CIMB's top pick for the sector, supported by Kossan's undemanding valuation and lower earnings correlation with the external environment.
At 10:30am, Kossan shares fell one sen or 0.2% to RM6.34 for a market value of RM4.05 billion. The stock saw 52,300 shares traded.
CIMB's comments came after the Malaysian Rubber Glove Manufacturers Association announced yesterday rubber glove prices, which had increased since early this month, were expected to rise further on costlier raw materials and as manufacturers contended with a stronger ringgit.
The association said in a statement the industry had also taken into account the impact of the anticipated minimum wage and natural gas price hike.