PETALING JAYA: Maybank Investment Bank Research has downgraded the rubber gloves sector from “overweight” to “neutral” as the valuations of the stocks are fairly reflective of fundamentals now.
Analyst Lee Yen Ling said price-to-earnings (PER) valuations had risen from eight to 16 times end-2012 to 11 to 19 times currently.
“Though new supply (for nitrile gloves) looks aggressive, near-term price competition is likely to be mild, for new capacity will just about match demand, we believe, with the latter expanding by about 20% year-on-year,” she said.
Demand for nitrile glove sales were also driven by a shift in customer preference from latex powder-free to nitrile gloves, she said, adding that margins for nitrile gloves remained higher compared with latex gloves by more than 6 percentage points as a result of higher pricing and lower raw material cost.
Lee pointed out that glove manufacturers usually did not gain or lose significantly on foreign exchange volatility as most of them bought forward contracts which expired in two to three months to sell US dollars when they delivered the products as a way to hedge their US-denominated receivables.
She added that the recent fuel price hike, which led to higher transportation costs for the companies, had insignificant impact on them as transportation accounted for only 2% to 3% of total costs, thus they were not adjusting glove prices.
The research house’s top pick was Kossan Rubber Industries Bhd on the back of its better value proposition compared with its peers.
She has given a higher target price of RM7.60 to the counter as she revised Kossan’s PER upwards to 16 times from 15 times.
Meanwhile, she maintained a “hold” rating on Hartalega Holdings Bhd with the same target price of RM6.71 whereas the target price for Top Glove Corp Bhd was re-rated downwards to RM6.40 with a downgraded “hold” call as weaker latex powder-free glove sales were factored in.
