MALAYSIA: Time to pick up shares of rubber glove makers

The recent sell-off on rubber gloves makers is an opportunity for investors to pick up battered down stocks such as Top Glove Corp Bhd at lower price points, according to AllianceDBS Research.

This is because the firm sees recent issues such as higher foreign worker levy and the cut in natural rubber exports by key producing countries as having “minimal” financial impact on the glove makers.

“We see opportunity for accumulation,” analyst Siti Ruzanna Mohd Faruk said in a note. Malaysia glove makers traditionally rely on cost pass through arrangement with customers which means that any changes in production cost would be reflected in their average selling prices (ASPs). “Given the cost pass through arrangement between glove makers and their customers, any increase in production cost, including raw material cost, will only affect their earnings for 1-2 months due to the time lag in adjusting ASP to reflect prevailing cost of production,” she said. As it is, the levy is absorbed by the foreign workers but in the event glove makers decided to absorb the hike, Siti Ruzanna said the impact to the companies’ earnings was estimated at less than 2 %.

The Government had proposed a hike in foreign workers levy from RM1,250 to RM2,500, a 100 % hike for those working in the manufacturing, construction and services sector effective February 2016 during the Budget 2016 recalibration. But, this had been put on hold at the moment pending discussions with stakeholders including representatives from the Malaysian Employers Federation, manufacturers, guild associations and non-government organizations.

Investors’ sentiment on glove makers was also affected by concerns that natural rubber prices may rise after key producing countries – Thailand, Malaysia and Indonesia – decided to limit their exports effective 1 March 2016.

Since the start of the year, shares in Top Glove Corp Bhd and Hartalega had declined by about 18 %, while Kossan Rubber Industries Bhd fell 26% and Supermax Corp Bhd dropped by 15 %. The research house’s top pick for the sector is Top Glove with target price of RM7.10.

Source: Daily “The Star”, Kuala Lumpur; 12 Feb 2016
(Syed Rashid Ali, Karachi, Pakistan)