Rubber products sector
Maintain “neutral”: With 15 child deaths and 22 states reporting a widespread flu virus in the United States, the Centers for Disease Control and Prevention (CDC) has officially declared flu an epidemic.
In order to be declared an epidemic, flu and pneumonia have to cause 6.8% of all deaths in a week.This was reached during the week ending Dec 20, 2014.
Despite flu being always seen as an epidemic, experts warned that the situation could worsen this time as winter continues. Flu activity generally peaks between December and February in the US with an average flu season length of 13 weeks.
A worrying trend is that the flu has been hitting earlier and earlier. CDC reported that about 90% of the flu cases are caused by the H3N2 influenza virus.
Not only leading to more hospitalisations and deaths, the mutating H3N2 is also causing the vaccine to lose its efficacy.
H3N2 is doubling the hospitalisation rate where 9.7 people per 100,000 have been hospitalised so far, compared with last year’s rate of 4.3. The proportion of people seeking healthcare services for flu has also increased to 5.5%, which is above their national baseline of 2%.
As such, we view this unfortunate development to be positive to the sector as a higher hospitalisation rate and higher demand for healthcare services will, in turn, increase demand for rubber gloves. Having said that, we continue to monitor the situation, and observe whether it will escalate to pandemic level.
We are maintaining our “neutral” stance on the sector until we see further deterioration translating into glove demand.
Catalysts are a surge in demand in the event of a disease outbreak, more stringent requirements, increased spending in the healthcare sector, appreciation of the US dollar against the Malaysian ringgit, and lower rubber prices to boost profitability.
Risks are a mismatch between demand and supply in rubber gloves, potential increase in natural and/or synthetic latex prices, and depreciation of the US dollar against the Malaysian ringgit.
Positives are softening of natural and/or synthetic latex prices, and continuous improvement in cost efficiency. Negatives are weakening of the US dollar against the Malaysian ringgit.
Until we see further deterioration of the flu virus and it turning into a pandemic, we are maintaining our “neutral” stance on the sector with the following ratings:
i) Hartalega Holdings Bhd — Maintain “hold” with target price (TP) of RM7.43, 16.2 times 2016 earnings per share (EPS) pegged to one standard deviation (1SD) above five-year historical average price-earnings ratio (PER).
ii) Kossan Rubber Industries Bhd — Maintain “hold” with TP of RM4.49, 12.8 times 2016 EPS pegged to 1SD above five-year historical average PER.
iii) Top Glove Corp Bhd — Maintain “hold” with TP of RM4.56, 13.5 times 2015 EPS pegged to 1SD below three-year historical average PER.
iv) Karex Bhd — Maintain “buy” with TP of RM3.43, 19 times 2015 EPS pegged to average PER of international peers. — Hong Leong Investment Bank, Jan 5.
This article first appeared in The Edge Financial Daily, on January 6, 2015.