Glove makers to ride on strong demand growth

Glove makers to ride on strong demand growth

Tags: Hartalega | Kossan | Top Glove

Written by The Edge Financial Daily
Friday, 14 August 2009 12:07

KUALA LUMPUR: Maybank Investment Research remains overweight on Malaysia's glove manufacturing sector, which has the top manufacturers in the world.

The research house said on Aug 14 it had raised the target prices of Hartalega and Top Glove by 19%-23% to RM6.50 and RM8.30. It also retained the Buy calls on Hartalega, Top Glove and Kossan.

It said expectation is for demand to grow by a strong 10%-12% per annum over the next five years, above its 5%-8% forecast.

Maybank Investment Research said the drivers are improved hygiene standards and healthcare awareness in developing countries like Latin America and Asia; higher incidences of major infectious disease outbreaks, an ageing population and rising economic and social conditions, and more outsourcing by large medical companies in US.

The challenges for the sector is the government's stand on foreign labour, double levy and tax benefits; lack of R&D in the industry; volatile latex prices and currencies, and energy issues.

However, glove makers should be able to continue passing on additional costs over time to mitigate exposure.

"We shall see selling prices being adjusted upwards in 3Q09 to accommodate latex prices' current uptrend," it said.

All producers are expected to post above-par core second quarter 2009 earnings, riding on lower material costs and orders surge owing to the H1N1 outbreak. Demand growth should be stronger ahead.

"We have raised Top Glove and Hartalega's FY09-12 net profits by 7%-13% but lowered Kossan's FY09 by 10% due to losses in structured currency product. The combined net profits of the producers are still expected to record a three-year compounded annual growth rate (CAGR) of 14%. Capacity expansion should support demand growth.

"Considering their dominant global market share, the sector's 2009-10 price-to-earnings ratio (PER) of 11 times to 13 times is undemanding relative to the FBM-KLCI 30's 17 times. We raise Hartalega's and Top Glove's TP to RM6.50 (+19%) and RM8.30 (+23%) respectively. We maintain Kossan's TP at RM5.30," it said.

From the Edge