Monday, 28 March 2011 11:34
Rubber gloves sector
Maintain overweight: Although Top Glove and Supermax have different views on the direction of latex prices in the short term, both agree that the commodity’s price should be lower than now by year-end.
Top Glove believes that since the rubber plantations in some areas are still undergoing the wintering season, the latex price should resume its uptrend towards the year high of RM10.90/kg.
Supermax, on the other hand, thinks that the recent rebound was the consequence of latex suppliers, who could not accept the recent sharp fall in latex price, resorting to cutting latex supply. However, from April onwards, Supermax expects the price to drop by 50 sen each month and reach RM5.50/kg by December 2011.
It is our view that whether short-term or long-term, the latex price may not go up much further from its year high of RM10.90/kg, even if it breaks this resistance level. We think speculation from here on will subside after the 21% crash in latex price.
Also, we think that latex supply will continue to increase because: (i) the wintering season for most rubber trees will be over soon; (ii) the flooding in Thailand has eased as the weather improves; (iii) the Japanese automotive industry is expected to slow down after the crippling earthquake, which would crimp tyre demand and ultimately affect natural rubber demand; and (iv) more natural rubber latex will now be available since some rubber glove manufacturers have been switching to nitrile gloves.
We do not discount the possibility the oil price shooting past its record high of US$147 (RM444) per barrel given the continuing turmoil in the Middle East and the US intervention in recent days. We believe that the prices of all commodities will spike up, including that of latex.
Maintain “overweight”. Our top picks are Top Glove Corp Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd. Besides the fundamental reason for a potential fall in latex price, we think the share prices of these three companies have bottomed after correcting by 30% to 40% from their year highs and have experienced minimal sell-off since 4Q10, despite being hit by: (i) rising latex price to an all-time high of RM10.90/kg; (ii) unrest in the Middle East; and (iii) crash in the Japanese stock market. Hence, we think the downside risk is now limited and are advising investors to gradually accumulate on weakness.
We expect their share prices to recover once latex price begins on a downtrend and when the US dollar strengthens against the ringgit. — OSK Research, March 25
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