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Monday, June 17, 2013

Alliance Research maintains "Overweight" on glove sector


KUALA LUMPUR: Alliance Research is maintaining its “Overweight” call on the glove sector, with Hartalega and Kossan being its top picks.
Alliance reiterated its “Buy” rating on Hartalega with a target price of RM6.80 as well as “Buy” on Kossan with a target price of RM4.85.
“We like Hartalega as a medium to long term investment (one to three years), as we are convinced that it will emerge as the industry's game-changer in two years' time, once its NGC plants kick start in August 2014,” it said.
Alliance added over the short term of 12 months, it continued to favour Kossan although its share price has already outperformed over the past six months.
“We believe that Kossan is still trading at an attractive valuation, less than 10 times price P/E for financial year 2014, as it moves up its value chain and improve its profitability,” it said.
Alliance added it retained its “Neutral” call on Top Glove with a target price of RM5.90 and Supermax at RM2.04 as it believes the strong nitrile migration wave could put both companies in a less favourable position such as margin compression, as both companies have less than 40% nitrile glove capacity currently.
“To recap, we upgraded the glove sector from “Neutral” to “overweight” on Dec 3, 2012, as we foresee the latex cost to stabilise between RM5.50 petr kg to RM6.50 per kg due to weak global demand, strong US dollar against the ringgit in the run up to the 13th General Election and improving supply and demand dynamics.
“Since then, the sector appreciated by 17.4%, outperforming the FBM KLCI by 7.8 percentage points. Among our top picks, Kossan and Hartalega outperformed both Top Glove and Supermax, generating a handsome profit of 31.9% and 33.1% respectively since Dec 3, 2012,” it said.
Moving forward, Alliance said it anticipates global glove demand to stabilise with 10% to 15% growth on-year in the second half of 2013 after a strong 15% on-year growth in the first half due to global influenza trend which had peaked in the first quarter.
“Based on the latest indicators from World Health Organization, the global influenza trend, particularly in the high-glove-consumption countries such as US and EU, has already eased in 2QCY13. While we do not rule out the possibility of virus mutation that could result in viruses such as H7N9 turning into a global pandemic going forward, we opt to be conservative by assuming structural demand growth, which is skewing towards nitrile glove segment,” it said.

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