BIMB SECURITIES RESEARCH

Monday, 26 March, 2012

MARKET INSIGHT
PP16795/03/2013(031743)

Sector Update

Overweight Rubber Glove

Latex Price Stabilised
Unlike the wild gyrations in 2011, latex price for 2012 has stabilised and trading between RM7.40 and RM7.90, averaging at about RM7.80/kg. This is due to intervention by the Thai government supporting the latex price to stay above RM7/kg on 24 January 2012. In the recent quarterly earnings season, most of the companies under our coverage have shown signs of improvement, especially Top Glove the largest natural latex glove maker, posting a 70% jump in QoQ earnings. We believe the worst is over for our glove makers amid a more stabilised latex price and improved demand. Earnings for the coming quarters shall remain firm hence our earnings forecast for all the companies under our coverage remain unchanged. We maintain OVERWEIGHT on the sector and maintain BUY recommendations on Kossan (TP: RM4.35), Supermax (TP: RM2.38) and Top Glove (TP: RM5.66) while Hartalega (TP: RM8.04) remains a NEUTRAL. Less fluctuation in latex price. To recap, the Thai government had on 24 Jan 2012 stepped into its rubber industry to support the rubber price, enabling latex prices to stay above RM7.00/kg in the short term. Ever since the move, latex price has traded within the range of between RM7.40/kg and RM7.90/kg; and averaged around RM7.80/kg YTD. Over the past 1 month, the difference between the high and low of the latex price did not go beyond 2%. Meanwhile, most glove manufacturers believe that latex price will trend around current range over the short to medium term. QoQ earnings improvement. In the recent quarterly earnings season, most of the companies under our coverage have shown signs of improvement, especially Top Glove the largest natural latex glove maker, registered a 70% jump in QoQ earnings. We believe the biggest contributor to the improved earnings would be the improved demand due lower selling price. Meanwhile, bulk purchasers are increasing their stock holding back to normal levels. Recall that when latex price was at its all time high at RM10.92/kg in April 2011, bulk buyers around the world have been keeping their inventory low, at 2 months compared to their usual inventory level of about 4 months. This level has been maintained despite latex price had dropped below RM7/kg as they anticipate further decline in latex price. Now that a price floor has somewhat been determined (with the Thai government intervention); expectations of further drop in latex price should diminished and we expect buyers to increase their inventory level back to their normal level. With this, the demand of rubber gloves shall return to normal. We have spoken to the management of glove players and they have confirmed that sales volume has been increasing as buyers are increasing their inventory level. Maintain OVERWEIGHT. We are maintaining our FY12 and FY13 earnings as we do not foresee any surprises in the coming quarters following the stabilisation of latex price. We maintain OVERWEIGHT on the sector and BUY recommendations on Kossan (TP: RM4.35), Supermax (TP: RM2.38) and Top Glove (TP: RM5.66) while Hartalega (TP: RM8.04) is a NEUTRAL. Nonetheless, we still like Hartalega and we recommend investors to accumulate the stock at lower level.
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The Research Team research@bimbsec.com.my 03-26918887 ext 111

www.bimbsec.com.my

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26 March 2012 Earnings Summary

Sector Outlook: Rubber Glove (OVERWEIGHT)

Hartalega
Market Cap as at 23/3/2012 (RMm)
Price as at 23/3/2012 (RM)

Kossan
1,064.7
3.33

Supermax
1,292.3
1.90

Top Glove
2,900.0
4.69

2,894.6
7.95

Target Price (RM)

Potential Upside Valuation methodology: 3year PER Band over CY12 EPS

8.04
1.1% 12x

4.35
30.5% 11x

2.38
25.2% 11x

5.66
20.7% 20x

Recommendation
Revenue (RMm) CY12 CY13 EBITDA (RMm) CY12 CY13 PER CY12 CY13 Earnings (RMm) CY12 CY13 EPS (sen) CY12 CY13 BV per share (RM) CY12 CY13 P/BV CY12 CY13 Dividend per share CY12 CY13 Dividend yield CY12 CY13 ROE (%) CY12 CY13
Source: BIMB Securities

NEUTRAL
944.9 1,048.8 331.6 359.6 12.3 11.3 236.1 255.7 64.8 70.2 2.05 2.52 3.9 3.2 22.0 23.0 2.8% 2.9% 35.4% 30.9%

BUY
1,476.0 1,612.0 215.3 233.0 8.4 7.8 126.3 136.5 39.5 42.7 1.85 2.16 2.4 2.0 11.0 11.0 3.3% 3.3% 23.2% 21.3%

BUY
1,194.3 1,342.6 181.1 198.5 8.8 8.2 147.0 157.6 21.6 23.2 1.32 1.52 1.8 1.6 3.0 3.0 1.6% 1.6% 17.6% 16.3%

BUY
2,308.9 2,583.1 279.6 301.9 16.6 15.2 175.0 190.4 28.3 30.8 1.96 2.10 2.9 2.7 16.0 17.0 3.4% 3.6% 14.7% 14.9%

Latex Price
RM/kg 8.00 7.90 7.80 7.70 7.60 7.50 7.40
7.30

Averaged around RM7.80/kg since 24th January 2012

Jan-12 Source: BIMB Securities/ Bloomberg

Feb-12

Mar-12

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26 March 2012

Sector Outlook: Rubber Glove (OVERWEIGHT)

Share Price Performance of Rubber Gloves Companies

9.00 8.00

7.00 6.00
5.00 4.00 3.00

2.00
1.00 0.00 Feb-11 May-11 Hartalega
Source: BIMB Securities/ Bloomberg

Aug-11 Kossan

Nov-11 Supermax Top Glove

Feb-12

Hartalega PE Band
10.00 9.00
8.00 7.00 6.00

Kossan PE Band
7.00

16x

6.00

14x 12x 10x 8x

5.00
4.00

18x

15x
12x
3.00 2.00 1.00

5.00
4.00 3.00 2.00 1.00

9x 6x

0.00
Sep-09 Sep-10 Dec-08 Dec-09 Dec-10 Sep-11
Sep-08

Jun-09

Jun-10

Jun-11

Mar-09

Mar-10

Mar-11

Dec-11

0.00
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Source: BIMB Securities/ Bloomberg

Source: BIMB Securities/ Bloomberg

Supermax PE Band
4.50 4.00

Top Glove PE Band

12.00 10.00

3.50
3.00 2.50 2.00

8.00

15x 12x
6.00
4.00 2.00

30x 25x 20x 15x 10x

1.50
1.00 0.50 0.00

9x 6x
3x

0.00
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Source: BIMB Securities/ Bloomberg

Source: BIMB Securities/ Bloomberg

www.bimbsec.com.my

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26 March 2012

Sector Outlook: Rubber Glove (OVERWEIGHT)

DEFINITION OF RATINGS BIMB Securities uses the following rating system: STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. NEUTRAL Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage. SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary market index over the next 12 months Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Disclaimer The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

www.bimbsec.com.my

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