Seeking value in resilient rubber sector
By RHB Research / The Edge Financial Daily | June 9, 2015 : 10:35 AM MYT
Downgrade to neutral from overweight: The rubber sector’s earnings for the first quarter of 2015 were in line with our forecasts with all stocks under our coverage posting a quarter-on-quarter increase in earnings.
Overall, earnings were driven by: (i) capacity expansion that helped offset falling average selling prices (ASP); (ii) increased operating efficiency; and (iii) favourable macroeconomic conditions. Of these, the former two helped industry players to record better margins during the quarter.
The Middle East Respiratory Syndrome (Mers) has led to a renewed interest in rubber glove counters. Nevertheless, we opine that the Mers outbreak will not have a material impact on earnings and any investor interest would only impact valuations in the interim.
Malaysian glove exports grew 8.6% year-on-year in 2014, of which 86.7% of total exports were medical-related — against 85.3% in 2013 — which highlights the increasing importance of gloves within the healthcare industry. Industry players remain optimistic about demand prospects and forecast that global glove demand will grow at an average rate of 8% per annum going forward.
We maintain our optimism on the fundamentals of the global glove sector and, in particular, are pleased to note that rubber glove players have managed to secure orders in advance for their upcoming capacity enhancements in 2015. We are not overly concerned about the much-touted oversupply issue, since we believe the players would be pragmatic with their expansion plans and time them to suit the prevailing demand landscape.
We downgrade the rubber products sector to “neutral” from “overweight” on valuation grounds, due to downgrades for both Hartalega Holdings Bhd ( Financial Dashboard) and Kossan Rubber Industries Bhd (Financial Dashboard). The key upside risk to our view is the rerating of the sector driven by liquidity as investors switch into defensive stocks during periods of market uncertainty, despite the lack of new catalysts in the industry.
As we remain confident of the fundamental prospects of the industry, we recommend that investors accumulate on dips, when valuations are more attractive. — RHB Research, June 8
This article first appeared in The Edge Financial Daily, on June 9, 2015.