KUALA LUMPUR: Rubber glove and condom counters on Bursa Malaysia continue to outperform the whole stock market by about 40 per cent, despite their share prices having settled quite a bit for the past week.
For the past two months, the drastic strengthening of the US dollar against the ringgit had enhanced the appeal of rubber glove-makers counters such as Hartalega Holdings Bhd, Top Glove Corp Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd including that of condom manufacturer Karex Bhd.
The rubber sector's cost strategy remains largely intact thanks to protracted weakness in global rubber and petroleum prices and strong US dollar, the currency they are quoted and sold.
With no change in electricity prices until end 2015 and growing global demand for the medical device, rubber glove players should be in good position to go on delivering good results in the second half of this year.
When contacted, JF Apex analyst Jessica Low said she remains positive on the rubber sector.
"The strengthening of the US dollar has not been fully-priced in the share prices of these counters. There is still room for appreciation. The share prices of these counters settled yesterday because the ringgit has rebounded slightly," she said.
While JF Apex is mindful of the pricing competition in the industry, she still is positive on these manufacturers benefiting from favourable foreign exchange and subdued raw material costs.
"We reckon that further weakness in the ringgit is still a short-term catalyst to the sector," she said.
Her top pick is Top Glove Corp Bhd.
"It's based on fundamentals. Top Glove's operational efficiency is improving, the cost control is much better now," Low said.
The positives of the weakening ringgit mitigated the adverse impact of rising raw material costs during the quarter where natural rubber latex prices rose to 4.52/kg from RM3.93/kg in the previous quarter amid wintering season.
On the whole, she noted that Supermax Corp Bhd's operating profit margin had expanded by 50 basis points to 12.5 per cent. Going forward, she expects the sharp depreciation of the ringgit to support Supermax’s topline growth.
On Hartalega's share price, she said there is still room to appreciate to RM8.88 from yesterday's close of RM8.22.
"We are positive on its productivity which far supercedes its rival. Also, the recently announced bonus issue will provide short term catalyst to its share price," she said.
Last week, Kossan announced that its second quarter profits ended June 2015 expanded by 37.1 per cent to RM47.4 million. This was achieved on the back of 27 per cent increment in its second quarter revenue to RM385.8 million.
MIDF Research, in its notes to investors last week, raised Kossan's target price to RM7.84 based on better operating efficiency and impending higher output and sales of rubber gloves.
Like rubber glove makers, Karex has been reaping benefits from the stronger US dollar as its condoms are sold in that currency.
Earlier this week, the condom maker told the stock exchange that its full-year net profit ended June 2015 of RM59.95 million was 73.3 per cent higher than RM34.59 million, a year ago. This was largely driven by higher volume and sale of higher margin condom, low raw material prices and favorable exchange rate.
When contacted yesterday, CIMB analyst Mohd Shahnaz Noor Azam thinks Karex is very likely to perform even better in the current financial year ending June 2016.
"Karex is well into its expansion and it is acquiring a rival with existing network of distribution in Europe," he said.
A couple of weeks back, Karex announced it was buying Medical-Latex (Dua) Sdn Bhd (MLD) from Beiersdorf Aktiengesellschaft AG for RM13 million.
MLD manufactures Beiersdorf’s condom brands such as Duo and Harmony for the European and Latin American markets. It also has its own in house brands such as ESP (Enjoyable Safe Pleasure) and N’Joy.
Karex’s established clientele consists of commercial global brand owners, government and non-government agencies.
Karex also manufactures condoms under its own brands namely “Carex”, “INNO” as well as the recent acquired ONE® brand.
For the past week, Karex share price slid 7 per cent and yesterday it closed at RM3.17.
CIMB's Mohd Shahnaz reckoned that Karex's price-to-earning ratio is on the high side and hence, investors might find the condom maker's share price too expensive.
"At CIMB, we're valuing Karex at 25 times its forecast earnings and that is higher than the glove sector valuation of more than 20 times," he said.
Two days ago, Hong Leong Investment Bank (HLIB) maintained a hold 'call' on Karex but raised target price of the condom maker to RM3.51.
HLIB analyst Abdul Hadi Manaf said Karex's effort in focusing on original brand manufacturing is becoming fruitful as profit margins have improved sequentially to 7 per cent from just 4 per cent, two years ago.
He shared his optimism that condom sold by MLD commands around 20-30 per cent premium as compared to Karex’s average selling price.
Also Karex has yet to leverage on MLD’s ability of producing 0.04mm (premium thinnest condom) versus its in-house production of 0.05mm.