After seeing the sharp rally in Supermx, one must be convinced that the rubber glove sector has turned the corner. The two most important factors determining the financial performance of these stocks are rubber latex prices, which are heading lower and the USD-MYR cross rate, which is moving favorably for rubber gloves makers. See Chart 1 & 2 below. This potential development was first noted in my post dated October 3 (here). So, what is the next stock to consider? I think it is Kossan, which is trading at a PE of 9 times.
Chart 1: TOCOM RSS3 price chart as at Oct 26, 2011 (Source: Rubbernet)
Chart 2: USD index's daily chart as at Oct 26, 2011 (Source: Stockcharts)
Recent Financial Results
Kossan's latest results is for QE30/6/2011. In that quarter, its net profit dropped 8.8% q-o-q or 30% y-o-y to RM20.9 million while turnover inched up 7.5% q-o-q as well as y-o-y to RM276 million. The bottom-line is still trending lower while top-line is still inching higher. With this divergent movement, the profit margin can only drop further. However, this could be about to change. That's why the results for QE30/9/2011 will be very interesting.
Table: Kossan's last 8 quarterly results
Chart 1: Kossan's last 20 quarterly results
Chart 2: Kossan's profit margin for the last 20 quarterly results
Valuation
Kossan (closed at RM2.78 last Wednesday) is now trading at a PE of 9 times. At that multiple, Kossan could be the most attractive rubber glove stock.
Technical Outlook
Kossan is still in a downtrend line, with resistance at RM2.90-3.00. A break above that level could signal the beginning of its recovery.
Chart 3: Kossan's weekly chart as at Oct 27, 2011_11.00am (source: Quickcharts)
Conclusion
Based on possible improvement in its bottom-line & current attractive valuation, Kossan is a stock worth close monitoring. As its technical outlook is still bearish, we should avoid buying into the stock for trading purpose. However, since we expect further improvement in this sector, those with a long investment horizon may slowly nibble into the stock.
7 comments:
could u pls comment why top glove not responding to all the good news. how do u rate latexx with even lower pe ratio?
thanks in advance
Alex :
In term of valuation wise Hartalega is still the cheapest. The potential is huge in comparision to any other glove maker. The market just doesn't aprreciate the fact. Hartalega is a much better bet than Kossan
Hi Akagi Shigeru
Hartalega will be hit on two fronts. It will face stiff competition from the other players who are diversifying into nitrile gloves; resulting in lower margin. Secondly, the raw material for making nitrile gloves rose by 12% in QE30/9/2011 while rubber latex dropped by 11% during that quarter. The source of that information is the notes to the accounts for Supermax for QE30/9/2011.
Hi Yung
top glove (at RM4.16) is not responding because it has a trailing PE of 23 times (based on last 4 quarters' EPS of 18 sen up to 31/8/2011).
You are right about latexx (at RM1.80) which is trading at a trailing PE of 6.7 times (based on last 4 quarters' EPS of 27 sen up to QE30/6/2011). Latex may be suffering from poor perception due to its recent unsuccessful buyout or reverse takeover by two different parties. For an outsider, you may ask yourself what's wrong with Latex. Is it fair to ask that question? Who knows!
Alex :
I beg to differ from your opinion. The cost of raw material for nitrile glove has been increasing since April 2011 to June 2011 ( because of the increase of the oil price ), however, due to the operational efficiency of Hartalega was able to post record earning in iys quaterly report ending June 2011. I do not know why you said the raw material cost has increased 12% in QE 30 Sept. maybe you would like to highlight me on that. I would appreciate that. If you look at Hartalega profit margin ( about 25% ) which is much higher than its peers, it is not wise for its' competitor to go for price war head to head with Hartalega. Hartalega could have upper hand shall there be a price war. Furthermore currently, ( according to the management ~ I attend it's AGM ), Hartalega order was actually 20% higher than it's production capacity ( 120% x its capacity ). All Hartalega needs to do is keep on increasing it's production capacity in near term without any need to slash it's product price. that is my 2 cents. Thank you.
Hi Akagi Shigeru
You raised two points:
1) Harta has been experiencing higher cost of nitrile latex since April. You seems to imply that this may not be a problem? I have read about this a few months ago but it was from the Notes to the Account of Supermax that I've learned that nitrile latex has moved up by 12% while the price of rubber latex has dropped by 11% (go here and read Note 6). Since the raw material cost is about 50% of the cost of sales, this means that rubber glove makers would now enjoy a margin improvement of 5.5% while the nitrile glove makers would suffer a margin compression of 6%.
2) As I have noted previously, Harta will come under pressure once there are significant competitors in the market. It is a natural thing. You want to defend your territory by offering something cheaper. The competitors would do the same. They may deny it but it will happen. I will be very surprised if it hasn;t happened yet. We will see this in the next financial reports.
Alex :
Of course the raw material cost is a major concern. But it is rather difficult to interpolate the margin squeeze of about 5.5 % for the case for Hartalega. Hartalega is quite unique and should not be viewed as a normal glove maker. Because of its production efficiency ( it's state of the art machine ), and superb R&D team, Hartalega is able to maintain it net margin. If we look at the note ( by Supermax ~ the link provided by you ), the nitrile rubber has increased from Q32010 (RM1436) to Q22011 (RM1896), an increase of 32%. But at the same period of time, Haratalega was able to maintain it's net margin well which post record profit quarter after quarter. I do agree with you, with the current competition, it is not a good thing for the glove makers. The thing is Hartalega has huge advantage in comparison to its' peers. You are right let see what kind of it's Q3 result it will post and we should have a clearer picture moving forward.
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