This article first appeared in The Edge Financial Daily on August 10, 2017
KUALA LUMPUR: The selldown in shares in rubber glove makers yesterday, which put Hartalega Holdings Bhd and Kossan Rubber Industries Bhd among the top decliners, is not indicative of how these companies may have performed financially in the last quarter, say analysts.
Amid the release of second-quarter financial results currently, analysts maintained their outlook for the glove makers’ earnings.
One analyst, who did not wish to be named, said the outlook for the entire sector remains robust.
“But the earnings of the other glove makers cannot be correlated with Hartalega, which might have seen some distortion from a favourable exchange rate,” she said.
Hartalega, which announced a 72% increase in net profit to RM96.39 million for the first quarter ended June 30, 2017 on Tuesday, saw its stock finish as the fifth-biggest decliner on Bursa Malaysia yesterday.
It was down 22 sen or 3.08% to RM6.93, with some 2.17 million shares traded. Hartalega’s market capitalisation of RM11.73 billion remains the highest among glove makers listed on Bursa.
Meanwhile, Kossan was the 14th largest decliner, falling 12 sen or 1.64% to RM7.18, with a trading volume of 242,000 shares.
Supermax Corp Bhd eased one sen or 0.53% to RM1.87, while small-capitalisation stock Careplus Group Bhd also fell one sen or 2.5% to 39 sen.
Top Glove Corp Bhd, however, bucked the trend, rising two sen to close at RM5.72, with a trading volume of 1.76 million shares.
“We think that the selldown in the rubber glove counters [yesterday] was attributable to profit-taking as the prices of the glove counters in general have been on an uptrend for the past two weeks,” said MIDF Amanah Investment Bank Bhd Research (MIDF Research) analyst Noor Athila Razali.
Noor Athila said second-quarter earnings estimates for the other glove makers are expected to be met due to a stable US dollar-to-ringgit exchange rate throughout the quarter, as well as a recovery in raw material prices.
“Price competition has also abated, which allows for better pricing of glove products which in turn would result in an improved revenue,” she told The Edge Financial Daily.
Out of 20 analysts covering Hartalega, 15 have a “hold” call on the counter, with a trailing 12-month target price (TP) of RM6.77 for 19 of the analysts, according to Bloomberg data.
Both CIMB Investment Bank Research and MIDF Research kept their “hold” and “neutral” calls on Hartalega yesterday, with unchanged TPs of RM7.06 and RM6.99 respectively.
“Although we like the group’s long-term prospects and leading position in the sector, we believe that current valuations have priced in these factors,” CIMB said in a report on the company.
MIDF Research said Hartalega’s valuation, which remains lofty at 26.6 times its financial year 2017 (FY17) price-earnings ratio compared with an average of 19 times for its peers, remains unattractive.
“Furthermore, its share price surpassed our target price last week, which further limits share price appreciation in our opinion,” MIDF Research said in a research report yesterday.
Hartalega’s share price appreciated some 50% from RM4.92 on May 2, to its all-time high of RM7.38 on July 3.
Separately, JF Apex Securities and PublicInvest Research raised their TPs on the stock to RM7.27 from RM5.79, and RM6.88 from RM5.30 respectively.
PublicInvest said its upward revision was based on the group’s better efficiencies that are expected to cushion higher costs to be reflected from FY22. However, it also believes the group’s expansion capacities are fully priced in at this juncture, thus limiting its share price upside.
Kenanga Research, the only research house to maintain its “outperform” view on the stock, said in its report yesterday that it continued to like the counter for its “superior margins, solid improvement in production and reduction in costs”, as well as its “new capacity expansion and dominant market position in the booming nitrile [glove] segment”.