THERE is correlation between the pricing of gas to glove production but the latest announcement by Gas Malaysia Bhd to raise its natural gas price is expected to have little impact on the glove makers’ operational cost.
With natural gas accounting for only 10-15% of glove manufacturing cost, TA Securities Research expects changes in natural gas selling price to have a minimal impact (or less than 1.5%) on the earnings of rubber glove manufacturers.
Last Friday, Gas Malaysia announced that the average natural gas selling price for the distribution segment is set at RM26.85/MMBtu for 2Q 2021 which is 21.3% or M4.71/MMBtu higher quarter-on-quarter (qoq) from the average selling price of RM22.14/MMBtu for 1Q 2021.
“Nevertheless, the latest net selling price is still lower than that of 2020 at RM33.65/MMBtu,” justified analyst Tan Kong Jin in a rubber sector update.
In a related development, TA Securities Research also shared that the current average selling prices (ASPs) of gloves are driven mainly by supply-demand and sentiment.
“Based on channel checks, the ASP trend for glove manufacturers varies,” the research house pointed out. “For instance, the ASP of glove from the market leader (Top Glove Corp Bhd) is expected to drop by about 5% month-on-month (mom) in April 2021 with a further 5%-10% mom decline in May 2021.”
However, the research house expects the ASP of Hartalega Holdings Bhd and Kossan Rubber Industries Bhd’s gloves to remain on an uptrend (circa-15% qoq) in 2Q 2021 given the time lag effect in adjusting the ASPs for their prior sales.
“All-in-all, we make no changes to our earnings estimates at this juncture for glove companies under our coverage,” noted TA Securities Research. “In our forecast, we have assumed the price of natural gas to decrease by 11% in FY2021.”
The research house makes no change to its target price for Top Glove at RM5.77 (15.0 times price-to-earnings ratio [PE]) and Hartalega (TP: RM17.12; 26.0 times PE) based on an unchanged FY2023 earnings per share (EPS).
Having rolled forward Supermax Corp Bhd and Kossan’s valuation base year to FY2023, it adjusted their target prices to RM6.80 (for Supermax with 12 times PE) and RM4.90 (for Kossan with an unchanged 11 times PE).
On the bigger picture, TA Securities Research also retained its “overweight” rating on the rubber glove sector.
“Currently, the gloves sector is trading at five times CY2021 EPS or nine times CY2022 EPS which is undemanding considering that the worldwide COVID-19 pandemic is not under control yet,” projected the research house.
“Key downside risks include (i) higher regulatory risk due to the forced labour issue in Malaysia; and (ii) faster-than-expected drop in ASP.” – April 12, 2021
