Glove makers gaining from demand

From The Edge Malaysia
5th Aug 2013

IN 2012, Malaysia exported about 100 billion pieces of rubber gloves, approximately 63% of the world' supply, to more than 180 countries. here are glove makers in other countries such as Thailand and Indonesia,but locally listed Hartalega Holdings and Top Glove Corp are the global market leaders for nitrile and latex gloves respectively.

The bulk of the demand comes from hospitals, hence the healthcare industry is an important one for glove makers. This burgeoning industry is expected to hit US$3 trillion by 2015, on the back of growing health awareness, increased spending on healthcare in emerging markets and the occurrence of new infectious diseases.

Hartalega to emerge as industry game-changer

From Star Online: Business

18th June 2013



Top pick: Alliance says Hartalega has the strongest capacity compound annual growth rate of 14.9% over the next eight years.

PETALING JAYA: Hartalega Holdings Bhd and Kossan Rubber Industries Bhd are Alliance Research’s top picks for the glove sector, with the research house reiterating an “overweight” recommendation on the sector.

“Among the two, 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 year’s time, once its Next Generation Integrated Glove Manufacturing Complex (NGC) kick-starts in August 2014 which could yield a 6% extra margin due to better efficiency.

Low natural rubber prices boost production of gloves

By Star Online: Business
31 July 2012

THE recent inaugural roundtable on the rubber glove industry has provided a deeper insight into the game plan of the nation's top rubber glove players to stay competitive and still reign as the world's largest producers of the product.

Malaysian manufacturers account for about 60% of global demand. The major players include Top Glove Corp Bhd, Supermax Corp Bhd,Kossan Rubber Industries Bhd and Hartalega Holdings Bhd.

Even though industry players' production costs are set to escalate further following the minimum wage policy and the expected removal of subsidies on natural gas by the Government, many are undeterred and will continue with their expansion programme locally and abroad.

Hartalega Holdings - Within expectations

By Kenanga Research

9 May 2012

Period    4QFY12/FY12

Actual vs.  Expectations

- Within ours and the consensus expectations. 

- The FY12 net profit made up 95% and 97% of ours and the consensus’ forecasts of RM212.3m and RM206.6m respectively.

Dividends   

- 4Q12: 6 sen net dividend

- FY12 to date: 18 sen net dividend

- Translating to a 2.3% net dividend yield.

Key Result Highlights

- QoQ earnings were flat while EBITDA margins were seen to be lower from 32% to 28%, mainly due to the higher nitrile latex cost as well as competitive sales pricing as more nitrile glove supplies from its competitors kick in. Meanwhile, Hartalega also registered a net gain in foreign exchange of RM782,000, which constitutes a small 0.9% of its profit before tax. 

- YoY earnings increased by 6% but the net profit margins fell from 26% to 22% due to higher feed cost as well as higher taxation, which increased by 7%. 

- We expect lower margins in the coming quarter due to more supplies of nitrile gloves and the timing difference from the depreciation of the USD.

Outlook   Neutral. Higher nitrile glove capacity may erode Hartalega’s lucrative margins. Nonetheless, due to Hartalega’s efficiency and cost structure, we believe Hartalega will still maintain its market leader position in the nitrile segment despite a more competitive sales environment.

Change to Forecasts
We maintain our earnings for FY13.

Rating  

- MARKET PERFORM

- Our Market perform rating is maintained as the current share price implies a 6% upside to the stock as measured against our TP of RM8.32. 

Valuation:We are keeping our target price unchanged at RM8.32. Our valuation is based on 12x FY13 EPS.

Risks:Higher nitrile latex price ahead 

Price: RM7.84

Target Price: RM8.32

[Source]

Glove makers to gain from wage rule in long run

PETALING JAYA: While the new minimum wage will dent glove makers’ earnings in the near term, it is expected to be beneficial for the industry in the long run, CIMB Research said.

“It will encourage glove makers to reduce their use of low-skilled labour and improve their manufacturing processes by using more advanced technology and methods.

“Also, we believe that wage inflation will make the smaller glovemakers less competitive and catalyse consolidation in the sector. This will strengthen the positions of the large glove makers, favouring those with more efficient processes such as Hartalega (Holdings Bhd),” the brokerage said in a note to clients.

On Monday, Prime Minister Datuk Seri Najib Tun Razak announced the details of the country’s wage floor for the private sector, with the monthly benchmark set at RM900 for Peninsular Malaysia and RM800 for Sabah, Sarawak and Labuan.

This translates to an hourly rate of RM4.33 and RM3.85 respectively.

Some analysts say the new minimum wage rule may encourage glove makers to reduce their use of low-skilled labour and improve their manufacturing processes by using more advanced technology and methods.

The policy applies to all workers in the private sector, save for those in domestic services, but it will only take effect six months after the Minimum Wages Order is gazetted.

The law, which will be reviewed every two years, affords some flexibility to employers as they can absorb a certain amount of allowances and fixed cash payments in calculating the new wages.

According to CIMB Research’s forecasts, the minimum wage could shave some 1% to 7% off glove makers’ financial year 2013 core net profit, but the brokerage has kept its “neutral” rating for the sector and estimates for the companies under its coverage as they may yet find ways to mitigate the impact of higher staff costs.

Other research houses have also maintained their ratings pending further clarification from the companies and the actual gazetting of the law.

Among the glove makers, Hartalega is the least affected by the setting of a wage floor due to its highly automated production facilities and high margins relative to its peers.

“We believe Hartalega will emerge the strongest from the higher wages as its operations are already lean and management is working hard to further automate its manufacturing process.

“With the highest margins (lowest post-tax cost base), technologically advanced manufacturing process and an aggressive eight-year expansion plan, Hartalega has the most wiggle room in the sector to price gloves competitively and gain market share,” CIMB Research said.

Management was aggressively working on further automating the stripping and packaging portions of its manufacturing process to reduce the use of low-skilled labour and optimise operating expenditure, it added.

CIMB Research said Top Glove Corp Bhd would be the hardest hit as a result of low margins and an oversupply for its gloves that could take two to three years to work off.

“We believe it would be challenging for management to pass on the cost of the minimum wage to customers. This would put further pressure on margins and Top Glove’s high-volume low-price model.”

Top Glove shares have reflected this, with the counter losing 13 sen, or 2.72%, to RM4.65, making it one of the day’s top losers.

In contrast, Kossan Rubber Industries Bhd and Supermax Corp Bhddipped one and two sen respectively to RM3.24 and RM1.87 yesterday, while Hartalega was unchanged at RM7.80.

For Supermax, CIMB Research said the manufacturer was ramping up nitrile production to 53% of capacity by financial year 2013. This could help curb rising staff costs, the brokerage added, as the cash cost of producing nitrile gloves was 20% lower than natural rubber.

Kossan, meanwhile, is poised to tap on the growth in China, where glove usage is a mere two gloves per person per annum versus 50 in Europe and 96 in the United States. Kossan entered the market in financial year 2012 via its 53%-owned Cleanera HK Ltd.

Moving forward, HwangDBS Vickers Research expects the additional staff costs to be passed on to customers over time.

Affin Investment Bank, in a report, also noted that Top Glove had previously said it would likely pass on 80% to 90% of the higher costs by increasing prices, which could prompt other glove makers to do the same.

[Source]

Minimum wage policy to impact glove and plantation industry

HDBSVR sees glove makers affected by minimum pay plan

KUALA LUMPUR: Hwang DBS Vickers Research expects the minimum wage for the private sector to affect the glove manufacturers of whichTop Glove to be impacted the most while Hartalega to be the least affected.

“We maintain Hold for Top Glove (TP: RM4.80), Hartalega (TP: RM7.70) and Kossan (TP: RM3.30). We expect the additional staff costs to be passed to customers over time, but in the immediate term, we expect earnings and margins to be dampened,” it said on Wednesday. The minimum wage for the private sector was set at RM900 per month for employees in the peninsula, and RM800 for workers in Sarawak, Sabah and the Federal Territory of Labuan. There will be a six-month grace period for implementation from the date the Minimum Wage Order is gazetted. The government has also provided some flexibility whereby some allowances or fixed cash payments are allowed to be absorbed in the calculation for minimum wage. HDBSVR said its sensitivity analysis showed staff costs would increase by 17%-22% while earnings could fall by 5%-19%, if minimum wage of RM900 per month is implemented assuming no change in average selling prices. “Based on our estimates, Hartalega's salary costs could rise by RM10mil a year (+17%) and this would lower FY13F net profit by 5%. For Top Glove, staff costs could rise as much as RM39mil (+22%), denting FY13F earnings by 19%.

“Meanwhile, we estimate Kossan's annual salary costs to increase by RM18mil (+17%) and net profit to fall by 13%. However, if fixed allowances or cash payments are allowed in the calculation for minimum wages, the impact will be softened,” it said.

Hartalega - MARKET PERFORM - Long term growth plan

By Kenanga Research
16 Apr 2012

We attended Hartalega's analysts briefing last Friday on its new Next Generation integrated Glove Manufacturing Complex- NGC project) and remain positive on the company's prospects. The wholeproject is planned for a total annual production capacity of 38b pieces p.a. by2021 (a long term CAGR in production of 16% from the current level of 9.7bpieces). We gather that management is currently applying for tax incentives onthe project cost, which would be an added bonus later as it would reduce the taxcharge on future earnings from the project, although this is not quantifiable at this moment until the incentives are finalised and approved by MIDA. 

We are on the overall positive onthe NGC project but note that it is more of a long term blueprint growth project to ensure that the company would still be able to grow its earnings by15%-20% over the longer term (the first phase is to be completed in 2017 only).Hence, for the immediate term, we are still maintaining our earnings forecastsfor FY12 and FY13, which should see the earnings growing by 12% and 19%respectively. With our unchanged forecasts, our current Target Price for the stock is retained at RM8.32, based on a PER valuation of 12x to its FY13 EPS.With total returns upside of 8%, we maintain a Market Perform rating on thestock. 

Further details on the NGC. Following its announcement on the NGCproject, Hartalega held an analysts briefing last Friday to give further details on its new manufacturing project known as the Next Generation integrated Glove Manufacturing Complex -NGC project).  To recap, the project will be divided intotwo 4-year phases over the next 8 years. Phase 1 (from 2013-2017) will see the building of 40 production lines with a total annual capacity of 14.0b whilePhase 2 (from 2017-2021) will see another 30 production lines set up with a total annual capacity of 10.5b pieces of gloves p.a. The project will hence see atotal of 70 production lines constructed with the ability to produce 40,000 pieces per hour (vs. the current average production rate of 22,000 pieces ofgloves per hour), bringing an hourly productivity boost of 60%. In total,Hartalega will see its annual production capacity rising to 38.0b pieces by2021  from the current 15.0b, translating into a 10-year CAGR of 15%. Management has identified the land for the NGCplant, which will be situated in Sepang on a land size of 112 acres. 

Tax incentives?  Furthermore,we gather that management is currently applying for tax incentives on theproject cost, which would be an added bonus later as it would reduce the taxcharge on future earnings from the project, although this is not quantifiable at this moment until the incentives are finalised and approved by the MIDA. TheNGC will also house a new biomass renewable energy plant (with a total capacityof 58MW vs. the current Hartalega's plant capacity of 26MW), which will reducenatural gas consumption by 17% from 8.8sm''/1000 pieces to 7.4sm''/1000pieces. 

Valuation. We are maintaining our earnings forecasts for FY12 and FY13for Hartalega as the NGC project is more a long term blueprint growth plan forthe company with Phase 1 only to be completed in 2017. With our unchangedforecasts, our current Target Price (TP) is retained at RM8.32, based on 12xFY13 EPS. Hence, we maintain our Market Perform recommendation.

Price- RM7.96

Target price- RM8.32

[Source]

Hartalega Holdings,HARTA- MARKET PERFORM

By Kenanga research

9 Apr 2012

Hartalega announced on Friday that it will set up a nitrile glove manufacturing project (known as the Next Generation integrated Glove Manufacturing Complex - HNGC project) with a total annual capacity of 38b pieces p.a. by 2022. We understand that it will house 70 production lines with the ability to produce 40,000 pieces per hour, which is 60% above Hartalega’s current average production. Phase 1 of the project shall be funded via bank borrowings and warrants conversion, and will raise its current net cash position to a net gearing of 0.2x. However, we are maintaining our earnings for now as the new expansion will take some time (Phase 1 commences only in 2017). Our Target Price for the stock is also maintained at RM8.32 based on 12x FY13 EPS. Maintain Market Perform rating.

Setting up of a new rubber glove manufacturing project. It was announced on Friday that Hartalega NGC SB, a wholly- owned subsidiary of Hartalega, will be setting up a nitrile glove manufacturing project (known as  the Next Generation integrated Glove Manufacturing Complex - HNGC project). The project is expected to begin in 2013 and targets to complete by year 2021 at an estimated cost of RM1.5b.  It will consist of 70 new hightech production lines (vs. 45 lines currently) and has been accorded the Entry Point Project (EPP) status under the ETP.

Triple its current production capacity by year 2022.  We understand that the project will be divided into two 4-year phases. Phase 1 (from 2013-2017) will see the building of 40 production lines with a total annual capacity of 14.0b and in Phase 2 (from 2017-2021), there will be another 30 production lines  with  a  total  annual  capacity  of  10.5b  pieces  of  gloves  p.a. Hence, by 2022, Hartalega will triple its current capacity of 9.7b pieces to a total annual capacity of 38.0b pieces. It will house 70 production lines with the ability to produce 40,000 pieces per hour (vs. the average production rate of 22,000 pieces of gloves per hour), which will boost Hartalega’s production by 60%. 

Funding.  As at 31 Dec 2011, Hartalega has a net cash of RM165m and assuming a total capex of RM1.5b spread evenly over 8 years, we expect a capex of RM750m for Phase 1. This shall be funded via bank borrowings, and warrants conversion with a maximum proceeds of c. RM308.5m, supposing full exercise of 74m warrants at the exercise price of RM4.15 per warrant. This will turn its current net cash position to 0.2x net gearing. 

No earnings revision at the moment. We are maintaining our earnings for FY12 and FY13 as it will take some time before Phase 1 starts to operate in 2017.  Valuation. We maintain a 12x PER valuation on our FY13 EPS, which derives our current target price of  RM8.32 (ex-TP: RM3.12 on fully diluted basis) for Hartalega. Due to the limited upside of only 5% for the share price from its current level, we continue to maintain just a  Market Perform  rating on the stock.   

Price- RM7.90

Target price- RM8.32

[Source]