by Justin Yap. Posted on January 12, 2011, Wednesday
KUCHING: The rubber glove industry has hit the trough and the current share price weakness has turned out to be a good opportunity for investors to gain exposure to an industry with steady long term growth prospects and one in which Malaysia is the global leader.
BRIGHT OUTLOOK: After the softening seen in 2010, global consumption of examination gloves are expected to revert to its trend growth of eight per cent per annum over the next few years – Photo from klsewin.blogspot.com
Citigroup Investment Research and Analysis (CIRA) analyst Fiona Leong pointed out that rubber glove stocks were the worst performers among stocks under the firm’s coverage in 2010.
The sector fell 24 per cent from mid-2010, weighed down by sequential decline in the second quarter
(2Q10) and 3Q10 earnings as the industry was adversely affected by various factors such as high latex prices, weakness in US dollar and softening demand.
Currently, glove stocks were trading below their historical average price earnings and the sector was valued at an undemanding 9.8 times of the CY2011E earnings.
At such, the analyst believed this would be a great opportunity for investors to tap into as long term growth.
Early signs of demand recovery sustainable were in late October and early November 2010, where glove producers reported a pick up in orders. Many attributed this to customers taking the view that latex prices might not retreat as hoped as latex supplies remained tight due to heavy rainfalls.
“Industry players expected lower latex prices in 4Q10 as rubber tree yields tend to reach a seasonal peak in November and December. The unusually wet weather had been a key factor that drove latex prices to a high of RM9.80 per kilogramme (kg) in late December,” said Leong.
The analyst believed the modest buying seen in 4Q10 was the beginning of a sustainable recovery in demand going into 2011. Customers’ inventory of examination gloves was estimated to have fallen
from the usual four months levels to two months.
Being a basic necessity for the healthcare industry, buying of examination gloves would resume as customers replenish stock levels.
After the softening seen in 2010, global consumption of examination gloves were expected to revert to its trend growth of eight per cent per annum over the next few years.
Meanwhile, the extremely tough operating environment seen over the past six months had forced out smaller producers that did not had the economies of scale and balance sheet strength. Recent deferment of capacity expansion plans by major producers would also reduce the industry’s demand supply imbalance and lift pressure on selling prices.
Contrary to expectations, latex price had continued on its steep uptrend over the past 24 months. It rose another 67 per cent to RM9.80 per kg in late 2010, after a sharp 75 per cent increase to RM5.90 per kg in 2009.
According to the report, erratic weather conditions as well as concerns over demand supply imbalances caused by strong surge in demand for rubber from China and declining supplies due to falling yields from aging trees had made it difficult for industry players to forecast latex prices in the coming year.
“Having said that, many are still hopeful for a pullback from current record high levels. Any easing in latex price would be positive as glove producers believe this would encourage customers to revert to their normal buying patterns,” said Leong.
On the other hand, price adjustment since late October would also help reflate margins. Since late October last year, major glove producers had adjusted selling prices six times to pass on higher raw material costs.
CIRA expected regular price adjustments from hereon as long as latex prices remained on an uptrend.
“Generally, this means improving margins in the months ahead, albeit with a slight lag effect and suggested that price competition from smaller players has abated. Another factor that would help restore margins was the gradual upturn in plant utilisation as orders begin to flow in.”
Leong further pointed out that another positive development was the more stable ringgit as glove producers’ sales revenue were almost entirely denominated in US dollars. After a strong appreciation from RM3.42:US$1 in December 2009 to RM3.06:US$1 in December 2010, CIRA economist expected the local currency to average at RM3:US$1 in 2011.
“This suggests that any adjustments in selling price for high raw material cost would not be offset by currency fluctuations. Glove producers will also have one less headwind to worry about,” Leong concluded.
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