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Malaysia: Glove sector to return to positive earnings
 
KUCHING: Despite underperforming in 2014, the glove sector is expected by analysts to return to positive earnings driven by capacity expansion which capitalises on resilient demand.

According to the research arm of Affin Hwang Investment Bank Bhd (AffinHwang Research), most rubber gloves companies in 2014, excluding Kossan Rubber Industries Bhd (Kossan), have reported weaker earnings which can be attributed to cost increases as well as competitive pressure.

After underperforming in 2014, AffinHwang Research expects most glove players to produce earnings growth, driven by a favourable operating environment and capacity expansion.

With more capacity coming on-stream, the research arm noted that strong earnings growth are expected to be driven by capitalising on strong demand.

It is confident that additional glove production capacity will be well absorbed by resilient global demand and outsourcing opportunities.

The research arm further noted that Kossan is expected to lead the market with the strongest earnings growth with two-year earnings compound annual growth rate (CAGR) of 24 per cent versus overall sector growth of 16 per cent.

“In view of the resilient demand for rubber gloves, glove manufacturers have been aggressively expanding their production capacities which would grow by 10.8 billion pieces in 2015.

“While there are concerns of a potential supply glut in Malaysia, closure of a 3.2 billion pieces plant in Thailand has a very high chance of transferring demand to Malaysian manufacturers given that customers source gloves from both countries,” it said.

On a side note, AffinHwang Research pointed out that pandemics are potential catalysts for the glove sector, as was the case with the emergence of Ebola in 2014.

“In 2014, we have seen the emergence of various types of diseases and epidemics, which include the recent Ebola virus outbreak in Western Africa,” the research arm said.

Based on the latest update, it noted that the number of people infected by Ebola was reported to be up to 21,833 cases with the disease claiming over 8,690 lives.

“We note that this deadly disease could extrapolate into a global pandemic if not contained, as it can be easily spread through direct contact of skin and bodily fluids,” it added.

Historically, AffinHwang Research said that pandemics and viral outbreaks have always resulted in a surge in demand for gloves especially in well-developed countries where healthcare awareness is high.

It noted that this is because gloves remain as the most basic and cheapest form of protection against any diseases.

“Nevertheless, our industry checks revealed that there was no spike in demand for gloves during the Ebola outbreak.

“We opine that this was due to the fact that African countries have comparatively lower healthcare awareness and purchasing power,” it said.

Thus, in the event that that a global pandemic or epidemic were to occur in countries with higher healthcare awareness such as US and European Union (EU), the research arm believes that this will result in a surge in demand for gloves which would be a significant catalyst for the rubber glove industry.

In the event of a global pandemic, AffinHwang Research believes that Top Glove Corporation Bhd (Top Glove) will be the main beneficiary in the case of an outbreak.

The research arm said that this is due to its current lower utilisation rates of around 70 to 73 per cent, which enables the company to quickly capitalise on sudden surges in demand and having the highest production capacity at 45 billion gloves per annum means it stand to grab a larger share of a sudden increase in demand than its peers.

With two-year earnings CAGR of 15.8 per cent and trading at an attractive 11 to 18-fold current year 2016 (CY16) price earnings (PE), the rubber glove sector offers above-market capital appreciation upside of 10 per cent, AffinHwang Research reiterated its ‘overweight’ call on the sector.

The research arm foresees a more favourable operating environment for the glove players in 2015.

“Earnings growth would be driven by demand growth, which the rising capacity of rubber glove manufacturers would be able to capitalise on.

“Although pricing pressure is expected in the short term, the lower raw material costs and conductive operating environment will strengthen glove players’ earnings,” it said.

Furthermore, AffinHwang Research reiterated that the closing down of a glove plant in Thailand would provide up to 3.2 billion gloves outsourcing opportunities for glove makers in Malaysia.

“Better cost efficiencies from automation and technological advances in new plants will help support margins and mitigate pricing pressure in the nitrile glove segment,” it added.

Read more: http://www.theborneopost.com/2015/03/09/glove-sector-to-return-to-positive-earnings/#ixzz3UE1PwZyK

 

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Last Update : 20 October 2017