1) a change in the supply & demand dynamics (due to rapid capacity expansion)
2) increased in raw material costs & energy costs
3) unfavorable movement in the exchange rates between RM & USD
With regards to the first factor, there is not much the industrial players can do about it. Obviously, the players would slowdown their expansion program but what's on the ground will stay. And, this will exert pressure on the takeoff rate & profit margin.
The largest cost item, rubber latex has been rising significantly over the past 2 years. If we look at the TOCOM RSS3 price chart below, we can see that there has been a sharp correction in the price last 2 weeks. Has the price of rubber latex peaked? We will have to wait & see. The other cost item, energy cost (for electricity & gas supply) is likely to remain high.
Finally, I expect USD to rebound in the near term. If we look at Chart 2 below, we can see that the USD index is in a 3-year uptrend with support at 76. USD index is present at 77. A rebound in USD index would liekly to coincide with a rebound in the USD-RM cross rate- a favorable development for exporters, including rubber glove producers. For the chart on the movement of USD-RM cross rate, go here.
Chart 1: TOCOM RSS3's price chart as at Mar 1, 2011 (Source: Rubbernet)
Chart 2: USD index's weekly chart as at Mar 1, 2011 (Source: Stockcharts)
I believe that the confluence of lower rubber latex price & a rebound in the USD-RM exchange rate would lead to improvement in the financial performance of rubber glove producers. In the current cautious to bearish market, one can take a small position in some rubber glove stocks which are trading at undemanding PE multiple as well as having pretty good technical support. Below, I have appended the charts for Topglov & Kossan which are trading at their strong horizontal support of RM4.80-4.90 & RM2.90-3.00, respectively.
Chart 3: Topglov's weekly chart as at Mar 1, 2011 (Source: Quickcharts)
Chart 4: Kossan's weekly chart as at Mar 1, 2011 (Source: Quickcharts)
Thanks for sharing the insight. However I still believe that nitrile glove producer like Hartalega would be better off at the expense of rubber glove producer since more consumers are switching to nitrile glove from rubber glove. for the past 2 quarters, Hartalega is actually making more profit than Top Glove. It's margin still remain healthy at 25%. it is now trading at annualized PE of 10-11 which is cheaper than Top Glove and Kossan in PE term. Hence Hartalega is still a better bet.
ReplyDeleteOverall its a good sharing... I have the opinion that the dollar will be a problem to the rubber makers... my pick for the glove sector would be harta and supermx...
ReplyDeletegood sharing.... my opinion would be the dollar will hamper the stocks for natural rubber gloves makers.... my take is still harta (superior tech) and supermx...
ReplyDeleteBased on the latest results, Kossan's PE is only 8, profit margin of 11%, ROE of 26% and D/E of 35%. It's profits and balance sheet remain strong, and it makes mix of nitrile and natural rubebr glooves. Kossan is also trading close to it's 52 week low. Hence I believe it is a good buy.
ReplyDeleteNice call, Alex!
kossan kept dropping broke the support line..cutlost ? or buy ?
ReplyDeleteHi My Views
ReplyDeletekossan broke the horizontal line of RM2.90-3.00. If there is no quick recovery above this level, the recommended risk management technique to cut loss. Terrible timing!
No idea why Kossan is dropping like that. It's fundamentals look sound. But best not to fight the trend!
ReplyDeleteDear Alex:
ReplyDeleteFrom the exicting news that are appearing day after day . Nothing seemed to spare . Negatives are more than the positives . To invest or not will be very much personal after considering the risks and gains .
Hi Alex,
ReplyDeleteWhat is your opinion on the 24 million legal action against PGA, a major subsidiary of Kossan?
Best Regards,
winterad99
Hi winterad
ReplyDeleteAfter reading details of the lawsuit, I do not think it is something that would seriously impact Kossan. We do not know its chances of success nor the quantum of damages that may be awarded. Lawsuits like this are a dime a dozen. Check out for yourself ( here ).
I have been monitoring Kossan's stock price these couple of days, it has been very volatile.
ReplyDeleteOn Wednesday, it was pushed down from RM 3.00 to RM 2.81 at close.
On Thursday, it was pushed from RM 2.81 to RM 2.95 at noon. Then in the afternoon session, it went back down to RM 2.81 again, before being pushed back up to RM 2.90 during the last 10 minutes before the market close.
On today (Friday), it went quickly to RM 3.00 in the morning before coming back down to Rm 2.87 around noon.
Any ideas what is going on? Does it look like a syndicate play?
Hi AlexP,
ReplyDeleteThe RM2.80-2.90 horizontal support is very critical for Kossan. I am too glad to see that it has recovered back above that level.
I doubt Kossan is a syndicate play. They do not need a syndicate to play it up when the time is right. If the time is favorable, even a syndicate cannot hold the price up.