Rubber Gloves Sector : Clever strategy to fill earnings vacuum OVERWEIGHT

SECTOR FOCUS OF THE DAY
Rubber Gloves Sector : Clever strategy to fill earnings vacuum OVERWEIGHT

We expect a still robust outlook ahead for rubber glove manufacturers. Our checks reveal an increase in demand, with order flows accelerating as customers take advantage of current cheaper priced products, notwithstanding the vacuum created by closure of some competitors due to the economic downturn. All in, we see a still positive outlook for glove manufacturers given strong fundamentals with both glove manufacturers under our coverage projected to deliver 3-year earnings CAGR of 16%-17%

. Coupled with our recent recommendation, which upgraded Top Glove from a HOLD to a BUY, we would now advocate an Overweight stance on the sector. Both Top Glove and Kossan have consistently delivered within our expectations in the past and their respective share prices have outperformed the KLCI year-to-date. In line with our revised target market PE of 15x, we have now pegged Top Glove’s FY10F earnings to a higher PE of 13x (previously 11x) and Kossan’s FY09F earnings to a higher PE of 11x (previously 9x). Kossan’s PE is at a discount to Top Glove owing to its smaller market capitalisation and lack of trading liquidity.

We deem the valuation fair given that both Top Glove and Kossan’s PEs are still below their respective 7-8 year average historical PEs (See Chart 3). While we like Top Glove for its leadership status and good prospects for sustained growth going forward, we also like Kossan as it offers greater room for capacity-driven growth off a smaller production base and a higher premium production mix on the back of high capacity utilisation rate.

BUY both Top Glove (FV:RM8.70/share) and Kossan Rubber (FV:RM4.90/share).