Rubber products sector
Maintain neutral: After a lacklustre performance in 2016 with an average return of -21%, rubber product companies outperformed the FBM KLCI in 2017 with an average return of 29% (47.5% ex-Karex Bhd) versus FBM KLCI at 9%.
As exports account for more than 90% of revenues which are denominated in US dollars while a substantial portion of the cost base denominated in ringgit, a stronger ringgit will affect revenue upon translation into the home currency. Top Glove Corp Bhd has the highest sensitivity towards US dollar depreciation. We believe that rubber product companies will be able to pass through the ringgit appreciation to customers via an increase in the average selling price relatively easily on the back of the shortage of gloves from China’s new environmental stance.
Latex and nitrile account for about 35% to 40% of total cost. Both raw materials experienced a sharp increase earlier during 2017 due to torrential rains and flooding affecting harvest for natural rubber (NR) and the shut down of several butadiene plants in Asia causing a shortage in a key ingredient for nitrile (NBR) production. In 2018, we expect the prices of both NR and NBR to be rangebound, with both NR and NBR to fluctuate within the RM5 per kg to RM6 per kg mark barring any further unforeseen circumstances such as flooding in rubber producing regions and/or butadiene plant shut downs.
In the calendar year 2018 (CY18), we expect the four rubber glove manufacturers to add an estimated 18.75 billion pieces in capacity (+14.8%).
We are maintaining our “neutral” stance on the sector for 2018 due to the historical high sector valuation (2 standard deviation above historical average) against the backdrop of a strengthening ringgit.
Our top pick for this sector is Top Glove (“Buy”; TP: RM 9.95). We see upside potential upon the completion of the Aspion Sdn Bhd acquisition which would transform Top Glove into the world’s largest surgical glove player by capacity. — Hong Leong Investment Bank Research, Jan 23