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.

Top Glove wants to source for its own latex

By Star Online: Business
15 September 2012

TOP Glove Corp Bhd became the first rubber glove maker to move upstream by acquiring its own rubber plantation land to ensure a consistent supply of latex.

In June, it paid RM22mil for a 95% stake in PT Agro Pratama Sejahtera for some 30,000ha of green field rubber plantation land in Indonesia.

Assuming that the land is fully planted, it will provide up to 50% of Top Glove's current latex consumption.

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.

Analysts have mixed views on Top Glove’s plantation buy

Star Online: Business
27 June 2012

PETALING JAYA: Analysts have mixed views on Top Glove Corp Bhd's move to acquire greenfield rubber plantation in Indonesia.

On Monday, Top Glove announced that its wholly-owned sub-subsidiary, Best Advance Resources Ltd, would acquire 95% equity or 5,700 shares in PT Agro Pramata Sejahtera for RM22mil.

Agro Pratama holds a 60-year licence to operate a rubber forest plantation covering 30,000ha on two islands east of the southern Sumatra city of Palembang (around 20,000ha in Kabupaten Belitung and about 10,000ha in Kabupaten Bangka).

Top Glove said the proposed acquisition was expected to be completed within 15 months from the date of agreement or any later date as agreed by all parties.

Several research houses including Maybank Investment Bank Research and Affin Research view the acquisition positively.

“We are long-term positive on this latest development as it will reduce the volatility of its key input cost. Top Glove's operating environment remains conducive for now, amid declining latex prices and a strengthening US dollar,” Maybank Investment said.

Affin Research views the acquisition positively, as it is in line with Top Glove's aim of expanding upstream into the rubber plantation business.

“Previously, the company had focused on acquiring land in Cambodia, However, progress has been slow and there have been consistent delays in approvals. Consequently, we believe that management may abort its Cambodia plans, especially since it has been able to acquire land elsewhere.

“That said, the Indonesia land acquisition is a greenfield investment. Taking into account land acquisition (estimated at 15 months), planting and maturity requirements, we do not expect to see any earnings contribution within the next five to seven years,” Affin Research said.

CIMB Research has a contrarian view on this, saying Top Glove could be spending RM400mil, or RM50mil per annum over eight years, to clear land and fully cultivate the estate following its move to acquire Agro Pramata.

“We take a dim view of Top Glove's purchase of a 30,000ha greenfield rubber plantation in Indonesia's southern Sumatra, as the RM400mil that it may spend on developing it over the next eight years could be put to more efficient use to enhance manufacturing and brand equity,” CIMB Research said.

It added that hedging the variability of natural rubber prices, a financial instrument would be more prudent and less capital-intensive.

It said in the best-case scenario, the first planting could start by the second half of 2012, with first fruits by 2019 to 2020.

CIMB Research said the high capital expenditure was expected to be funded internally and the 30,000ha plantation could support a 12 billion-pieces-per-year glove-making facility.

“The acquisition is not a surprise as management has been talking about buying rubber plantation land for some time. Last quarter, it hinted that it may acquire land in Indonesia instead of Cambodia due to procedural difficulties there.

“We are negative on the acquisition as we believe that the capital allocated could be used to enhance Top Glove's manufacturing process and brand instead.

“Also, the rationale for diversifying upstream is to hedge the natural rubber price, which we believe is misguided. A less capital-intensive method would be to use the financial exchanges in Singapore and Japan,” CIMB Research said.

[Source]

Top Glove Corporation - OUTPERFORM - 15 JUNE 2012

By Kenanga Research

15 June 2012

Period   3QFY12/9MFY12

Actual vs.  Expectations

Above ours and the consensus’ expectations. 

The 9MFY12 net profit already made up 91% and 85% of ours and the consensus’ forecasts of RM152.3m and RM164.2m respectively.

Dividends   A first single tier interim dividend of 7 sen was declared. This was 40% higher than last year’s interim dividend of 5 sen, translating into a net interim dividend yield of 1.1%. 

Key Result Highlights

QoQ, the EBITDA margin fell slightly from 14% to 13% while earnings increased also slightly by 1%. This was mainly attributable to the higher average latex cost, which increased by 10% QoQ to RM7.52/kg. 

YoY, the turnover increased by 13%. Apart from the higher average selling price (“ASP”) YoY, the sales volume has also increased by 8% due to stronger demand from customers. 

The strong demand is mainly due to customers taking advantage of the lower ASP as compared to last year, where it peaked at USD39 per thousand pieces as opposed to low USD30’s per thousand pieces during the quarter. 

Earnings almost doubled as the EBITDA margin improved from 9% to 13%. The higher margins were mainly due to lower latex costs, which had dropped by 14% YoY (from RM10.11/kg in 9MFY11). 

Outlook  We are in the midst of reviewing our Neutral call on the overall sector as we are looking to upgrade it in view of the likely lower latex price going forward as well as the potential appreciation of the USD/MYR, which would significantly improve the industry’s margins. 

With that in mind, coupled with the company’s stronger-than-expected results performance, we are raising our estimates as well as rating and target price on Topglove (see below). 

Change to Forecasts

We have boosted our FY12-13E earnings by 33-34% to RM202.5-229.8m as we revised our USD/MYR assumption from RM2.85/MYR to RM3.09/MYR.

Rating  UPGRADE to OUTPERFORM

We are upgrading our rating to OUTPERFORM from MARKET PERFORM as the current share price now offers a 24% upside for the stock as measured against our TP of RM5.80.

Valuation   We have raised our target price (TP) for the stock to RM5.80 from RM4.66 in tandem with the rise in our earnings forecasts. The TP is based on an unchanged targeted PER valuation of 17.7x on FY12 EPS.

Risks  Higher latex price and a stronger ringgit against the US dollars.

Price: RM4.66 

Target Price: RM5.80

[Source]

Top Glove: Maintain Buy - Make This Your Top Priority

By Maybank IB Research
11 June 2012


A conducive operating environment. Upcoming 3QFY8/12 results is likely to meet expectations. We expect Top Glove’s earnings growth momentum to sustain on the declining latex cost, stronger USD and
higher sales volume. Additionally, its current plant automation exercise will see the group largely unscathed by the minimum wage hikes. Valuation is still undemanding with forward PER of 14x, below its mean
of 16x. Maintain BUY and TP of MYR5.40 (16x CY13 PER).

3QFY8/12: Expect earnings growth.  3QFY8/12 results is due to release on 14th June. We expect sequentially stronger core net profit of around MYR40m (+6% QoQ) on higher sales volume (+5% QoQ) and stable margins. Glove ASPs was raised to pass on higher latex cost (+2% QoQ). However, there may be some substantial unrealized forex loss as the USD closed higher (+6% from end-Feb 2012).

Long-term low latex price outlook.  Latex price has fallen to MYR6.80/kg (-4% MoM) on seasonal normalization of the rubber trees’ yield. On a YoY basis, the YTD latex price has also dropped substantially by 25% on weak global demand outlook. Going forward, we expect latex price to persist at low levels given the long-term rising rubber supply surplus outlook.

Labour reduction drive. In response to the minimum wage hikes (wef Nov 2012 for Malaysia), Top Glove will improve the automation levels of all of its plants (installing auto-stripping/counting/stacking machines), over the next one year which will cost the group c.MYR80m. The financial benefits are: (i) reduction in the impact of wage hikes to total cost to 2% (from 4% without improvement on automation) as unskilled
workforce will reduce by 30%; (ii) increase in effective capacity by 20% on higher productivity of the lines and consequently (iii) building/capex for new plants could be deferred.

Beneficiary of a stronger USD. Almost all of Top Glove’s sales is in USD and majority of its cost is in MYR. Although Top Glove will pass on the savings to its customers, there  is currently a 2-month time-lag in
adjusting the glove ASP downward. We maintain our forecasts, looking at a firmed recovery in FY12 (+59% YoY) and 10-12% in FY13-14 p.a.


Share price: MYR4.60
Target price: MYR5.40 (unchanged)

[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.

Top Glove: Upgrade to Buy - In top form again

By Maybank IB Research
24 Apr 2012

Upgrade to Buy. We have turned positive on Top Glove: (i) its sales
has picked up further and is almost back to its H1N1 peak; and (ii) latex
cost  (key input)  has begun its seasonal downtrend  and is likely to
sustain at lower levels due to global rubber supply surplus this year.
We  raise our FY12-14 EPS  forecasts  by 8-12% on lower latex cost
assumption. Post-revision, Top Glove trades at 13x CY13 PER, below
its 5-year average of 16x. We upgrade the stock to Buy (from Sell), with
a higher TP of MYR5.40 (+29%) on 16x PER target (previously 14x). Its
share price has fallen by 15% from its peak in Jan 2012.

Sales almost back to H1N1 peak. 2QFY12 (Dec-Feb) sales volume
(est. 6.4b pcs)  was  inching  close to its H1N1 peak  (est. 6.7b pcs)
during 1HFY10, and continues to rise. Sales volume recovery after 2
years stems from: (i)  a resumption  in buying activity from Brazil after
running down its overly high inventories in 2011 (Brazil overbought its
glove requirements during the H1N1 period in 2010); (ii) Top Glove has
been adding  nitrile capacity to compensate for the ASP-led latex
market share loss. Nitrile sales is now 2x YoY higher and accounts for
14% of total sales volume (2011: 11%).

Latex price coming off, likely to sustain at lower levels.  In Apr
2012, latex price exhibited the first post-wintering weakness, retreating
5% MoM to MYR7.40/kg. Though it has reached the floor price set by
the Thai government (at MYR7.40/kg), we believe  latex price  will
undershoot the floor price as supporting the commodity price amid a
prolonged  global rubber  supply surplus  is uneconomical.  The
International Rubber Study Group (IRSG) is projecting a rubber supply
surplus of 81k tonnes in 2012 (from a deficit of 159k tonnes in 2011).

Firm recovery in FY12. With majority of its sales in the latex segment
(74% of total sales), a surplus-led lower latex cost will help Top Glove
to at least sustain its margins. We lower our latex cost assumption by
7%, resulting in an 8-12% upward revision to our FY12-14 EPS
forecasts. We now look to a sharp 64% YoY net profit recovery in FY12
to MYR185m, higher than its pre-H1N1 net profit of MYR169m in FY09.


Sales volume on an upward trajectory again

Brazil to support volume recovery.  Top Glove’s sales volume has
picked up again since 2QFY11 (+5% QoQ) and we expect its sales to
continue its upward trajectory trend. We note that orders from the Brazil
glove distributors have just, in Feb  2012, reverted to the  H1N1 level
after running down their glove inventories in 2011. Brazil now accounts
for 15% of Top Glove’s total sales volume, compared to 10% in 2011.

New nitrile lines  to capture nitrile growth. The demand switch to
nitrile glove was prevalent in 2011, which saw Top Glove’s latex glove
export volume falling 25% YoY while nitrile grew 28% YoY. Hence, the
company has been predominantly adding new nitrile capacity to tackle
the demand switch. Over the past  1 year,  Top Glove slowly  added
around 3b pcs of nitrile capacity (7% of total capacity) and nitrile glove
now accounts for 14% of its total sales volume (FY11: 11%).

Expect overall sales to continue rising. All in, we think Top Glove’s
overall glove sales volume will continue to rise  given: (i) more nitrile
capacity scheduled to come online to cater for the greater nitrile
demand; and (ii) organic growth for latex powdered glove from the
emerging markets, albeit slow. We project 25.3b pcs sales volume in
FY12 (unchanged)  and Top Glove has  sold est. 12b pcs in 1HFY12.
We thus expect 10% HoH sales volume increase in 2HFY12.


Latex price outlook turning favourable again
Latex price ready to dip again. In Apr 2012, latex price exhibited the
first post-wintering weakness, retreating by 5% MoM to  MYR7.40/kg.
The rise in latex price  during wintering period  this year is also less
sharp than 2011, signifying  more balanced demand-supply
fundamentals.  Additionally, latex price 2012-YTD is also substantially
26% lower YoY.

And, to  potentially undershoot floor price. Though the Thai
government has set the latex floor price at MYR7.40/kg (similar to the
current spot price), we think it is very likely that the latex price will
undershoot the floor price. We believe supporting the commodity price
amid a prolonged global rubber supply surplus is uneconomical.

Global rubber supply turning surplus. Latex price recorded a peak
of MYR11/kg in 2011 due to the supply tightness. However, in view of
the rising supply (new trees planted in 2005 are ready for tapping), the
International Rubber Study Group (IRSG) is projecting  global  rubber
supply to turn a  surplus of 81k tonnes in 2012 (from a deficit of 159k
tonnes in 2011).  This is a new projection by the IRSG that was
released in Feb 2012.

Stable margins on lower  latex cost. Although  current  input cost
favors the nitrile glove sales (NBR cost at 9% discount to latex), a lower
and more stable NR latex  cost  will help  Top Glove to  sustain its
margins. However, management reckons that the glove distributors still
have the upper hands in latex powdered ASP negotiations as the
utilization of Top Glove’s latex powdered lines of 70% is still below its
ideal utilization of 80%.


Earnings outlook

Earnings upgrade of 8-12% in FY12-14. In view of the global rubber
supply surplus, we have revised our latex cost assumption lower by 7%
resulting in 8-12% upward revision to our FY12-14 EPS forecasts. We
have not imputed for any minimum wage hikes in our model. Top Glove
has around 5,500 unskilled workers being paid c.MYR600/month,
below the government’s proposed minimum wage of  MYR800-1,000.
Nevertheless,  the  company is in the midst of installing more robotic
arms at its nitrile plants to reduce its labour requirement.

Expect stronger 4QFY12. We expect its 3QFY12 core earnings to be
flattish QoQ (2QFY12: MYR38m) on marginally higher sales and stable
margins as wintering season-led latex cost increase this year is
relatively mild. However, 4QFY12 earnings could be driven by lower
latex cost. In 1HFY12, company reported a core net profit of MYR85m
(+37% YoY), against our revised full-year FY12 net profit forecast of
MYR185m, indicating our expectation of 18% HoH earnings growth.

A sharp recovery year in FY12. We now project its earnings to grow
64% YoY in FY12 on sales volume and margins recovery, coming from
a low base in FY11 (due to the collapse of H1N1-fuelled demand and
overcapacity in latex powdered segment). Our projected FY12 net profit
of MYR185m is still below its high of MYR245m in 2010 but above its
pre-H1N1 net profit of MYR169m in FY09.

Modest growth in FY13-14. For FY13-14, we project a high single digit
EPS growth of 9% p.a., derived from sales volume growth of 7% p.a..
While our FY13-14 forecasts  have not imputed for  YoY  margins
recovery, this could be off-set by an anticipated minimum wage
implementation by as early as May this year. Overcapacity at the latex
powdered segment should be absorbed in FY13-14 on  rising, albeit,
slow organic growth from the emerging markets and this should lift its
margins further.


Valuations: Back to mean. Our new target PER of 16x pegs the stock
back to its mean valuations as we believe sentiment towards the stock
has turned positive on long-term global rubber supply surplus outlook.






Share price: MYR4.43
Target price: MYR5.40

[Source]