Rubber Products
Maintain “overweight”: Global glove consumption is expected to remain strong, led by demand from the healthcare segment, and is anticipated to expand 8% to 10% per annum.
Demand is often touted as inelastic due to the crucial protective role that gloves provide, especially for the healthcare sector. Thus, glove suppliers have a resilient earnings profile combining defensive qualities with steady earnings growth. We believe that the additional capacity from the expansion in nitrile production will be absorbed by the market. The commissioning of new production lines is being done progressively, which will enable the glove makers to time upcoming capacity to the prevailing demand landscape.

The strengthening of the dollar against the ringgit will benefit the industry because revenue will have a greater sensitivity to the greenback relative to costs. A 3% increase in the exchange rate could lift the industry’s earnings by approximately 2% to 4%.

We maintain our “buy” recommendation on the stock as we continue to like its organic and inorganic growth potential. We have a higher target price of RM3.89 (from RM3.43), i e 20 times FY16F price-earnings and a 14.4% upside, on the back of an expected three-year FY14-FY17F earnings per share compounded annual growth rate of 23.8%.

Heightened competition among glove players could lead to lower average selling prices and margins that, in particular, would not bode well for Top Glove Corp Bhd and Supermax Corp Bhd, as both are margin laggards in the industry. We continue to like stocks in the rubber products sector that have good earnings growth, strong balance sheets and decent dividend yields.

Our top picks are Hartalega Holdings Bhd, Kossan Rubber Industries Bhd and Karex Bhd. — RHB Research Institute, Dec 31

This article first appeared in The Edge Financial Daily, on January 2, 2015.