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Thursday, December 22, 2016

CIMB Research upgrades glove makers to ‘overweight’

Thursday, 22 December 2016

PETALING JAYA: Glove makers are poised to record sequentially stronger earnings on improved supply-demand dynamics and a more favourable operating environment due to the weak ringgit.

CIMB Equities Research, which has upgraded the glove manufacturing sector to “overweight” as its risk-reward profile improves, said the external environment with the strengthening US dollar favours glove manufacturers.

“Ramp-up in capacity still a concern, but glove makers have collectively stepped up efforts to stagger incoming new capacity to alleviate price competition.

“Upgrade to ‘overweight’ on better supply-demand dynamics and favourable US dollar,” it said in a report yesterday.

CIMB Research said following the US presidential elections on Nov 8, the ringgit has significantly underperformed most regional currencies.

Overall, this is positive for glove manufacturers given the export-orientated nature of the business and that over 90% of their receipts are in US dollar.

“Moving into 2017, we expect the US dollar to strengthen further given the potential of further US Fed rate hikes and bond fund outflows.

“This will lead to a more conducive environment for glove makers to operate in, in our view,” it said.

The sharper depreciation of the ringgit against the US dollar compared with other glove producing countries will increase the competitiveness of Malaysia’s glove sector.

“Hence, we expect a pick-up in glove exports, leading to better supply-demand dynamics,” it said.

CIMB Research pointed out that after three consecutive quarters of decline in average selling prices (ASPs) due to pricing competition, ASPs for glove makers have started to stabilise, with promising signs of a gradual increase.

“Although the bulk of the ASP increase from the recent uptick in latex prices, we expect glove makers to record margin expansion as the net impact from the strengthening US dollar offsets the increase in latex prices.”

It noted that although the sector’s aggressive capacity ramp-up over the next two to three years is a concern, glove makers have committed to taking preventive actions to mitigate any oversupply situation.

For instance, Top Glove Corp Bhd, and Hartalega Holdings Bhd have highlighted plans to begin commercial production from their new lines on a more gradual basis, depending on market supply-demand dynamics.

As for Kossan Rubber Industries Bhd, it may revamp its older lines, offsetting its new incoming capacity if the price competition persists.

“We believe the worst is over for the sector as the glove makers are poised to record sequentially stronger earnings. Given the improved supply-demand dynamics and a more favourable operating environment due to the weak ringgit, we upgrade the sector to ‘overweight’.

“We think investors should focus on companies that are key beneficiaries of a strong US dollar, like Top Glove.

“We also like Supermax Corp Bhd for its relatively cheaper valuations versus its peers. Key downside risk to our call is the sharp strengthening of the ringgit,” it added.

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