PETALING JAYA: Affin Hwang Capital believes 2020 would be a better year for glove makers, as they would likely benefit from stronger demand from the US after its imposition of a 15% tariff on Chinese imported gloves.
“As the concern in the third quarter (Q3) is being resolved, the rubber glove manufacturers are poised for a better 2020. The improving prospects and likely stronger earnings growth will help with a re-rating of the sector; hence we upgrade our sector rating from neutral to outperform,“ the research house said.
Despite the weak nine months (9M19) results, Affin Hwang is upgrading the sector to overweight from neutral, as it believes that the worst is over and earnings growth would resume in 2020.
Higher production costs and labour issues were the two common factors that led to the earnings disappointment.
“We believe that the companies are already addressing the issues, and we are expecting better performance starting Q120.”
Sector earnings for 9M19, down by 12% year-on-year (y-o-y), came in below both the consensus and the research house’s estimates, delivering around 66% of the respective forecasts.
Apart from the increase in production cost (higher utilities cost) arising from the natural gas price hike in July, the sector was also faced with labour shortage since the hard cap on overtime limited the total allowable overtime in a month to 104 hours only.
“As both were industry-wide issues, almost all the glove makers recorded declines in profit y-o-y for 9M19. Due to the weak performance, we had cut our earnings forecasts for 2019-22 by 5%-6%.”
Affin Hwang said the 5.3% hike in natural gas tariff in July is believed to have reduced gross profit margins by 0.5%-0.8% in Q319. It was challenging for the manufacturers to raise prices with such short notice (three days), as the lead time for orders was around 45 days.
“Given that the impact of the gas price hike was across the board, we believe that the manufacturers have already started passing on the higher cost to customers. Hence, we are expecting margins to recover in Q419.
“Longer term, unless the government is willing to provide a one to two weeks’ notice prior to a price hike, the problem would likely persist.”
It made some changes to its preferred picks, as Top Glove Corp Bhd and Kossan Rubber Industries Bhd are now its top buys for the sector.
