Glovemakers’ selldown overdone?

After climbing to all-time highs in the middle of last month, the share prices of Malaysian listed glovemakers have been on a steady downward trend.

This week, the selling pressure accelerated after a research house, HwangDBS Vickers, downgraded the sector on Monday, although other research houses immediately came to defend their bullish calls.

Yesterday, Top Glove Corp Bhd fell 21 sen or 3.28% to RM6.20, Supermax Corp Bhd inched down six sen or 0.99% to RM5.99, Hartalega Holdings Bhd eased six sen or 0.76% to RM7.84, Latexx Partners Bhd dropped four sen or 1.15% to RM3.45 while Adventa Bhd finished five sen or 1.74% lower at RM2.83.

However, Kossan Rubber Industries Bhd rose for a second consecutive day, up four sen or 1.06% to RM3.80 at yesterday’s close.

Headwind is the buzzword for the glovemaking industry at the moment, with concerns ranging from overcapacity, record-high latex prices, the appreciation of the ringgit and a cut in gas subsidies.

The Edge Financial Daily had highlighted some of these issues in our main story on Tuesday. To be fair, these concerns started to emerge among investors almost a month ago — and probably was a catalyst for them to lock in gains.

The glovemakers’ shares all hit a high around June 15. Since then, shares of Top Glove and Kossan have declined about 15% while Supermax is off just under 10%.
It would appear the stocks did not react to HwangDBS Vickers’ research report alone, but to the various headwinds facing the industry. Indeed, several research houses have come out strongly in the last two days with positive reports., defending their calls.

On Tuesday, Deutsche Bank and CIMB Research came out with positive reports on the sector. Deutsche Bank maintained its “buy” calls on Top Glove and Supermax while CIMB reiterated its “overweight” call on the sector.

Deutsche said: “Despite the positive fundamental backdrop, the Malaysian glove industry is trading at just 8.9 times price-to-earnings ratio for fiscal year 2011, a 35% and 29% discount to the Malaysian and Asean markets, respectively. We believe concerns of margin pressure are overdone and we reiterate our buy ratings on Top Glove (RM8.25 target price) and Supermax (RM7.23 target price).”

CIMB said: “In recent months, rubber glove stocks have come under pressure as investors fret about issues such as overcapacity, the weak US dollar, high latex prices, a potential rise in energy prices, margin contraction and premium valuations.”

In its report, the research house said it was of the view that each of the concerns had been “overdone”.

“We are confident that demand growth is strong enough to absorb the new capacity and the glovemakers’ pricing power will allow them to pass on cost increases. The sector remains an overweight and all the glove stocks under our coverage remain outperform.

“Factors that could catalyse the sector include the continuing uptick in demand from the healthcare industry, capacity expansion and strong earnings growth. Supermax and Latexx remain our top picks,” it said.

Analysts said concerns of overcapacity risks may be overblown. Glovemakers had shown they had the management and technical flexibility in managing their manufacturing capacity in the past, said various analysts.

However, despite these analysts’ optimism, it should also be noted that the glovemaker stocks have racked up sizeable gains since the start of 2009. Thus, investors may be looking for an excuse to lock in their hefty gains.

Latexx’s share price, for example, has surged 7.3 times in the 19-month period, while the lowest performer in the sector, Kossan, is up 2.6 times.

A chartist at a local brokerage said the selldown in the sector was not unexpected. Technical indicators were showing “bearish divergence” prior to mid-June even though share prices had been going up.

Going forward, he said the selldown could continue for the next one or two weeks as trading momentum in general was expected to slow during the fasting month of Ramadan that began yesterday.

However, for those with a longer-term investment horizon, this period could be a buying opportunity as “share prices are down but not really falling dramatically”, he said.

Industry players contacted by The Edge Financial Daily presented a moderate picture. Several said rising latex prices were expected to be temporary.

They said demand from the developed markets of the US and Europe had slowed, but according to one glove player, Kossan, customers were holding off their orders in expectation that latex prices will drop.

Industry players too were holding back purchasing raw materials, as they expect rubber and latex prices to fall in the next two to three months, following the current wintering period of rubber trees.

All the glovemakers are also pretty confident of their planned capacity, saying that expansion plans are in line with the orders of their clients.




by Loong Tse Min
This article appeared in The Edge Financial Daily, August 12, 2010.