Tuesday, February 22, 2011

Margins of rubber glove firms pinched

 By Ooi Tee Ching

High latex cost and weak US dollar have started to hurt the profit margins of rubber glove companies such as Supermax Corp Bhd and Latexx Partners Bhd, based on their recent quarterly results.


Most analysts, however, are still positive on Hartalega Holdings Bhd, which makes more synthetic rubber gloves than the natural rubber variant.

A sectoral analyst said she continues to have a "buy" call on Supermax's shares although the glovemaker's fourth quarter profits ended December 2010 of RM32.72 million was 14 per cent lower than a year ago.

"We have a 'buy' call because at current levels, Supermax's valuation is still attractive," she said when contacted by Business Times.

Her forecast is based on a conservative estimate of natural latex cost averaging at RM8.60 per kg and the US dollar trading at RM2.90.

She said natural latex consumption will continue to decline as more glove manufacturers join the bandwagon to ramp up nitrile gloves production.

"We'll only change our evaluation if natural latex becomes even more costlier and the US dollar weakens further. We're keeping our fair valuation of Supermax shares at RM6.30 on the basis of a price-to-earnings ratio of 11 times," she added.

OSK Research analyst Jason Yap, in his recent note to investors, also placed a "buy" call on Supermax.

"Our target price for Supermax remains unchanged at RM7.84 based on the existing price-to-earnings ratio of 13 times," he said.

Yap's top two rubber glove favourites are Supermax and Kossan Resources Industries Bhd.

"Supermax's valuation still stands out over some of its peers given its single-digit valuation.

"Going forward, we believe Supermax would be re-rated when natural latex price gets toppish, which we think would be sometime in May 2011 when the wintering season of rubber trees is over," he added.

An analyst from a bank-backed research house said she likes Hartalega's strong profit margin and estimates that the share price to rise as high as RM6.14.

Hartalega's third quarter profit ended December 2010 went up by 5.5 per cent to RM49.20 million from RM37.20 million a year ago.

It is able to make more profits than its rivals because 80 per cent of its total production are synthetic rubber gloves.

"The rise in nitrile latex prices is far less drastic than in natural latex and this is to the advantage of Hartalega when compared to its rivals," she said.

Also, Hartalega is the only rubber glovemaker that has automated its stripping and packing lines to lower its production cost and is seen the most efficient rubber glovemaker in the world.

"We like Hartalega because of its technological advancement over its competitors. We've raised our fair value of Hartalega to RM6.14 from RM5.64 on the basis of a price-to-earning ratio of 10.5 times," she added.

No comments:

Post a Comment