Rubber glove sector downgraded

Rubber glove sector downgraded
Published: 2010/01/27


MIDF Research has downgraded the rubber glove sector to "Neutral" from "Overweight" due to concerns over sustainability of global glove demand growth, expected excess glove production capacity and earnings margin sustainability.

"After the remarkable surge in 2009, the price momentum carried through in 2010 with a 15.9 per cent - 30.3 per cent year-to-date," it said in a research note today.

However, moving forward, MIDF Research said the returns prospect of glove companies are expected to be less promising from the risk-reward perspective.

The research house said the market is expecting global glove demand to hit about 150 billion pieces this year, with a growth rate of eight to 10 per cent annually.

"Although we also anticipate glove demand to continue rising, mainly from developing countries, there is a risk that the growth demand will be lower, considering that the domestic glove production and export values last year were not as high as reflected by consensus estimate of eight to 10 per cent per annum," it said.

For the cumulative 11 months last year, production volume and export value grew by only 2.0 per cent year-on-year and 0.8 per cent year-on-year to 42 billion pieces and RM6.46 billion, respectively.

"In addition to lower volume, the slower growth in export value was also attributable to lower average selling price in tandem with the lower average latex price in 2009," MIDF Research said.

It said there was no guarantee that lower average selling price would lead to higher demand and export volume, adding that the diminishing threat of the H1N1 viral outbreak would be a drag on demand.

MIDF Research said glove makers were expanding their production capacity more aggressively this year with an average increase of 26.6 year-on-year growth.

"An additional capacity of 15 billion pieces of glove is expected to be available by the second half of this year. In 2011, the glove makers planned to expand their capacity by another 16 billion pieces of glove," it said.

MIDF Research said earnings margin should be safeguarded in the first half of this year given the higher plant utilisation rate and better pricing power.

"We believe margin sustainability is highly dependent on the issues of demand sustainability and excess production capacity," it added. - BERNAMA