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EQUITY RESEARCH
Unattractive valuations without clear positive catalysts in sight for the near term
Strong demand may not translate into better margins The rubber glove industry has certainly continued to see healthy demand globally, with sales volumes remaining on an uptrend. While we concur with the glovemakers views that demand will remain strong amid a growing population and rising healthcare awareness, we are concerned about the potentially weaker pricing power for glove manufacturers as the aggressive expansion plans being put up by each major player suggests that competition looks set to increase somewhat significantly as soon as the end of this year. While we continue to monitor closely ASP trends for the glovemakers, we maintain our view that as more nitrile (NBR) capacity comes onto the market progressively, heightened competition within the segment is likely to prompt downward revision of ASPs, resulting in less lucrative margins moving forth. Lower raw material costs to benefit, but likely to be passed on Due to lacklustre automotive industry globally, rubber prices have remained weak throughout the first half of the year. As natural rubber (NR) latex and NBR raw material account for c.50-60% of total cost of production, soft raw material prices should provide a boost to glovemakers earnings. Nonetheless, in line with our view highlighted in the above section that stiffer competition is likely to weaken the pricing power of glovemakers, we believe that much of the cost savings from such will be passed on to customers. Valuations appear unattractive with impressive YTD performance Owing to the H7N9 virus outbreak in China in late-March 2013, the four Malaysia-listed glovemakers have rallied between 15-34% YTD (except Supermax, at +2.6%), outperforming the KLCIs 5.1% gain over the same time horizon. Following this, glove stocks trade between 0.7-2.7SD above their respective long-term averages, which are not cheap, in our view, considering the lack of near-term positive catalysts for the sector. Thus, we see limited upside potential for share prices from current levels. We think that Top Glove, Supermax and Kossan are currently fairly priced, but Hartalega appears to be trading at rather lofty valuations amid declining ROEs and high PEG of 2.2 on our estimates.
Fig. 1: Stocks for action
Stock HART MK KRI MK SUCB MK TOPG MK Rating Reduce Neutral Neutral Neutral Price (Jun 12) (local) 6.30 4.45 1.95 6.39 TP (local) 4.70 4.35 2.15 6.20 Potential up/dow nside (%) -25.4% -2.2% 10.3% -3.0%
Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus We are Neutral on the sector, diverging from the Bullish street view, on our expectation of mounting pricing pressure as a result of keener competition in the industry.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Contents
3
10
Pandemic outbreaks
10
Healthcare reforms
12
Hartalega Holdings Kossan Rubber Industries Supermax Corp Bhd Top Glove Corp Appendix A-1
17
22
27
32
Note: NBR makes up 99% of SR (synthetic rubber) gloves Source: MREPC, Nomura research
NR
SR
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009
U.S.
Europe
RoW
Total
2010
2011
2012
Note: Numbers in bold are actual values; others forecast. Forecasts are end of period and modal. Table reflects data available as of 6 June 2013. Source: CEIC, Nomura Global Economics
Raw material prices weaker than expected Due to a large newly planted and re-planted area of rubber trees, we have expected NR latex prices to remain soft in the mid-term on the back of ample upcoming supply. Nonetheless, we have seen flattish prices over this years wintering period while NR latex prices have remained below the 600sen/kg mark since early-April, owing largely to the weak automotive industry globally. We hence revise downwards our average NR latex price assumption to 590/615 sen/kg for FY13F/FY14F, from 630/620 sen/kg. We also lower our average grossed-up NBR raw material price assumption to 553/563 sen/kg for FY13F/FY14F, from 608/611 sen/kg.
Fig. 7: New and re-planting of rubber trees by ANRPC countries
'000 ha 600 500 400 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: The Association of Natural Rubber Producing Countries (ANRPC) account for c.94% of the worlds NR production based on our estimates. Source: ANRPC, Nomura research
Fig. 8: NR latex price typically peaks around February in the absence of other factors
sen / kg
Re-planted area
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Note: Pink highlights mark the end of February for each year. Source: Bloomberg, Nomura research
Jan-13
1,000
600
400
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
but cost savings are likely to be passed on As raw materials comprise the largest chunk of each glovemakers cost of production, lower NR latex and nitrile cost are likely to generally mean improved profits and margins for the manufacturers. While this is the case, we note also that ASPs are always adjusted in tandem with the change in raw material costs. Such is likely to be especially true in the current operating environment where we expect the more intense competition to weaken the glovemakers pricing power. Thus, we expect the bulk of cost savings to be shared with the customers, muting somewhat the positive effect that softer raw material costs could have on earnings. Among the four listed glove manufacturers, we note that Top Glove and Supermax are the ones which appear to be more sensitive to raw material prices. As depicted in the charts below, margins of the two firms are inversely correlated with average latex prices. Kossan on the other hand does not display the same pattern, while that of Hartalega is rather the opposite of that of Top Glove and Supermax. We attribute such observation to 1) the NR-heavy product mix of Top Glove and Supermax, rather balanced mix of Kossan, and the NBR-focused Hartalega; and 2) the different business strategy deployed by the firms Hartalega and Kossan are relatively more focused on quality and do not adjust ASPs as aggressively, while Top Glove and Supermax appear to be more keen to compete on price, in comparison.
Fig. 11: EBITDA margins vs. NR latex price Top Glove
% 25 20 15 10 5 0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13
EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS)
EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS)
EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS)
EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS)
Valuations
The Rubber Gloves sector has significantly outperformed the KLCIs 5.1% gain YTD; with the exception of Supermax, with its mere 2.6% gain, while the other three listed companies have rallied 15-34%. We note that most of the gain has been accumulated since April, with the onset of the first H7N9 case in China back in late-March 2013. We believe that other factors driving the recent run likely include the favourable raw material prices and the weakening ringgit versus the US dollar which will both contribute to better top- and bottom-lines for the glovemakers. Nonetheless, following the recent rally, glove stocks are now trading between 0.7-2.7SD above their respective long-term means suggesting that the stocks are not cheap. We thus think that the favourable costs are already priced into the stocks at current levels. Taking into account current trading multiple and growth prospects, while Top Glove, Supermax and Kossan appear fairly priced, we believe Hartalegas valuations are lofty, considering the fact that its profitability is, in our view, set to look less attractive with declining ROEs amid the entrance of all other major glovemakers into its dominant NBR segment. Thus we have a Neutral rating on Top Glove, Supermax (upgraded from Reduce) and Kossan, while we maintain our Reduce rating on Hartalega.
Fig. 15: Valuations at a glance
Based on consensus (Bloomberg) estimates
31-Dec-12 Top Glove Share price 1y fwd P/E Supermax Share price 1y fwd P/E Kossan Share price 1y fwd P/E Hartalega Share price 1y fwd P/E 4.75 13.77 3.36 9.21 1.93 8.98 5.63 15.03
3y Avg
Com panies Malaysian glove-m akers Top Glove Corp Supermax Corp Kossan Rubber Industries Hartalega Holdings International glove-m akers Ansell Cardinal Health Kimberly-Clark Corp Semperit AG Sri-Trang Agro 3M Co Other health-related Mani Inc Nipro Corp Shandong Weigao Microport Scientific Corp Mindray Medical Intl Ltd-Adr Bangkok Dusit Med Service Bumrungrad Hospital Pub Co
Ticker TOPG MK SUCB MK KRI MK HART MK ANN AU CAH US KMB US SEM AV STA TB MMM US 7730 JP 8086 JP 1066 HK 853 HK MR US BGH TB BH TB
N.R. (5.9) NEUTRAL 146.5 N.R. 19.4 N.R. (0.2) N.R. 34.8 NEUTRAL 18.5 BUY 13.3
Note: Pricing as of 12 June 2013 Source: Bloomberg (for Not rated stocks), Nomura research
Risks / catalysts
Pandemic outbreaks
In the past, the largest driver of share price performance for the rubber glove sector as a group has been pandemics both with the SARS (2003-06) and the H1N1 (2009-10). We have, again, seen such an effect over the last two months when China began to report a spurt in cases of the H7N9 virus. On this front, we note that the H7N9 is beginning to quiet down with only 4 new cases reported between April 30 and June 10 (current total 131 cases, as per a China Daily report dated June 10, 2013). However, we cannot rule out completely any chance of this flu worsening further. We opine that the H7N9 virus touching off a pandemic outbreak will be the largest immediate positive catalyst for the sector, as glove demand is likely to spike up globally as a result.
Fig. 18: Share price correlation with pandemics Fig. 19: Market cap-weighted share price performance vs. number of new H7N9 cases reported
MYR 9 8 7 6 5 4 3 2 1 0
Jan 00 Jan 01 Jan 02
Supermax Hartalega
% 14
12
12
SARS
H1N1
10
10
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
0
10-Apr-13 11-Apr-13 12-Apr-13 13-Apr-13 14-Apr-13 15-Apr-13 16-Apr-13 17-Apr-13 18-Apr-13 19-Apr-13 20-Apr-13 21-Apr-13 22-Apr-13 23-Apr-13 24-Apr-13 25-Apr-13 26-Apr-13 27-Apr-13 28-Apr-13 29-Apr-13 30-Apr-13 3-Apr-13 4-Apr-13 5-Apr-13 6-Apr-13 7-Apr-13 8-Apr-13 9-Apr-13
-2
-2
Healthcare reforms
A catalyst from the more fundamental perspective will be any healthcare reforms introduced, particularly in the populous countries / regions. We note the vast discrepancy between glove usage and population between parts of the world (refer LHS chart), which suggests that using glove usage as a gauge for hygiene awareness, a large majority of the worlds population has a long way to go in terms of improving the healthcare regulations. Based on glove imports and population data, we put together the RHS chart below which shows, again, the gap between glove usage of the different countries. Thus, given the large population in the emerging countries (particularly China and India), we see a large latent demand in the region. We estimate that the current glove usage per capita of China is close to 1.3 pcs p.a. less than 1% that of the US. Thus, assuming that glove usage in China doubles to 2.6 (1.7% that of the US), that would imply an additional demand of more than 2bn pieces of gloves each year. While rising affluence could lead to higher healthcare awareness, we think that a spike in glove demand could only be seen if hard regulations are put in place by the government. Though we do not expect such to happen in the near future, we believe that the Chinese government is working towards this direction with its 12th Five-Year Plan (2011-15) depicting Chinas intention to improve the countrys healthcare standards including the prevention and control of major diseases outbreaks and communicable diseases. We view any healthcare reform as a longer-term catalyst for the rubber gloves sector.
10
80% 60% 40% 20% 0% % of world population (2009) U.S. EU27 % of global glove usage (2009) RoW
140 120 100 80 60 40 20 0 US Hong Kong Australia UK Japan Brazil Mexico Indonesia China India
11
Hartalega Holdings
HEALTH CARE & PHARMACEUTICALS
HTHB.KL HART MK
EQUITY RESEARCH
June 17, 2013 Rating Remains Target price Increased from 4.15 Closing price June 12, 2013 Potential downside
Reduce
MYR 4.70 MYR 6.30 -25.4%
Anchor themes We expect healthy long-term demand outlook due to growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus Our TP is 16% below consensus on expectations of lower margins moving forth and TP being pegged to a lower P/E multiple; we think the stock is expensive at current levels.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784
FY16F New
Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)
1,032 235 235 31.67c 15.0 19.9 13.1 6.0 2.0 33.9
1,165 236 236 32.29c 6.5 N/A N/A N/A N/A 28.8
1,209 251 251 33.04c 4.3 19.1 12.1 5.2 2.4 29.8
1,376 254 254 34.73c 7.6 N/A N/A N/A N/A 26.1
1,351 279 279 35.47c 7.4 17.8 10.7 4.6 2.5 27.9 N/A N/A N/A N/A
1,636 322 322 39.72c 12.0 15.9 9.1 4.0 2.8 27.4 0.2
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
10.5 31.0 64.1 5.4 30.0 66.6 10.0 22.7 51.4 1,473.0 44.9 6.4/3.83 1.31
50.1 5.0
Notes 22.8 22.8 22.9 17.1 2.0 23.0 7.4 15.5 17.2 31.9 31.1 27.9 21.6 22.0 45.3 3.8 1.2 36.2 46.7 19.6 19.6 19.9 14.9 2.0 14.7 6.0 13.1 14.5 29.1 32.8 29.7 22.7 23.2 38.9 1.8 0.6 33.9 45.5 19.1 19.1 19.1 14.2 2.4 19.6 5.2 12.1 14.1 31.2 31.2 26.8 20.7 22.3 45.0 21.6 4.9 29.8 36.5 17.8 17.8 17.8 13.3 2.5 15.1 4.6 10.7 12.7 31.2 31.9 26.8 20.7 22.7 45.0 18.5 3.7 27.9 32.1 15.9 15.9 15.9 11.8 2.8 14.1 4.0 9.1 10.9 30.0 30.9 25.8 19.7 23.5 45.0 15.3 3.0 27.4 31.3
We expect margins and returns above industry average; dividend payout policy of more than 45%
13
Cashflow(MYRmn)
Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates
FY12 289 -37 -52 200 -35 165 0 0 0 0 -25 140 -87 0 0 0 -7 -94 46 117 163 -139 FY13 339 38 -59 317 -18 299 0 0 0 0 -176 123 -99 0 0 0 -5 -104 19 163 182 -170 FY14F 377 -61 -73 244 -261 -17 0 0 0 0 0 -17 -113 0 0 0 20 -92 -110 182 73 -52 FY15F 430 -20 -83 327 -250 77 0 0 0 0 0 77 -126 12 0 0 1 -112 -35 73 38 -16 FY16F 505 -42 -100 363 -250 113 0 0 0 0 0 113 -145 12 0 0 1 -132 -18 38 19 3 Notes
Significantly higher capex for large, long-term capacity expansion plans which should see capacity more than triple upon completion (estimated completed in FY21F)
Balancesheet(MYRmn)
As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates
FY13 182 0 125 87 0 394 1 486 7 49 936 8 93 15 115 4 0 50 170 1 0 367 399
FY14F 73 0 156 117 0 346 1 693 7 49 1,096 13 93 15 121 8 0 50 179 1 0 379 537
FY15F 38 0 176 125 0 338 1 876 7 49 1,271 13 101 15 129 8 0 50 188 1 0 391 691
FY16F 19 0 212 158 0 389 1 1,043 7 49 1,489 13 129 15 157 9 0 50 216 2 0 403 868
Notes
Reducing cash pile in line with high capex; expected higher earnings should move Hartalega back to net cash position by FY16F
620 758
766 936
916 1,096
1,082 1,271
1,271 1,489
4.42 149.8
3.42 339.7
2.87 270.8
2.63 285.2
2.48 310.8
0.01 0.2
14
Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose.
15
While we believe that Hartalega deserves to trade at a premium to sector average P/E multiple, we opine that its current valuations are expensive particularly given the upcoming keen competition in the NBR segment which has previously been dominated by Hartalega. We further note that we expect Hartalega to see ROE decline from 36% in FY12, 34% in FY13 down to 27% in FY16F, owing to shrinking EBIT margins and lower asset turnover. As well, a PEG ratio of 2.2 on our estimates suggests that current lofty valuations appear to be somewhat unjustified for its growth potentials.
16
KRIB.KL KRI MK
EQUITY RESEARCH
June 17, 2013 Rating Remains Target price Increased from 3.80 Closing price June 12, 2013 Potential downside
Fundamentals intact but recent rally leaves behind limited upside, in our view
Action: Raising TP to MYR4.35; maintain Neutral We revise our TP upwards to MYR4.35 from MYR3.80, as we update our raw material price assumptions, capacity estimates and exchange rate forecasts, while rolling forward earnings to FY14F. Taking into account the new inputs, we adjust upward our net profit estimates for FY13F/FY14F by 2.7%/7.5%. Despite foreseeing better earnings to flow through for Kossan, we think that its current share price upside is somewhat limited post its 27% run-up since the start of April; we thus maintain our Neutral rating. Catalyst: Any slowdown in upcoming supply could mean higher pricing power and better margins While we believe that demand for rubber gloves is likely to remain on the back of increasing healthcare awareness, our concern lies mainly on the weakening pricing power for glovemakers as upcoming supply is likely to result in heightened competition. Major delays in large expansion projects or a sudden surge in demand will, however, give glovemakers better pricing power, resulting in better-than-expected margins and profits. Valuation: Fairly priced at current levels, in our view Kossan shares currently trade at 10.3x FY14F EPS of 43.36sen nearly +0.7SD above its long-term mean of 9.1x. We think such a valuation is fair as it is in line with the industrys long-term average one-year forward P/E. We arrive at our TP of MYR4.35 by pegging its FY14F EPS to a target multiple of 10x.
Neutral
MYR 4.35 MYR 4.45 -2.2%
Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus While our FY13F/FY14F earnings estimates are in line with consensus, our TP is 7% below consensus as we think Kossan is already fairly priced at current multiples.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784
FY15F New
Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)
1,234 102 102 32.06c 14.6 13.9 8.0 2.3 2.0 18.6
1,343 120 120 37.78c 12.3 N/A N/A N/A N/A 19.5
1,368 124 124 38.78c 21.0 11.5 6.6 2.1 3.1 19.1
1,449 129 129 40.33c 6.8 N/A N/A N/A N/A 18.3
1,524 138 138 43.36c 11.8 10.3 5.9 1.8 3.9 18.9 N/A N/A N/A N/A
1,705 155 155 48.66c 12.2 9.1 5.0 1.6 4.9 19.0 net cash
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
10.4 30.5 46.9 5.3 29.6 49.2 9.9 22.3 34.3 454.6 48.8 4.5/2.97 1.03
51.2
Notes
15.9 15.9 15.9 15.2 2.5 30.9 2.9 9.5 12.8 30.2 14.7 11.0 8.2 19.3 39.3 3.7 1.0 19.0 16.6
13.9 13.9 13.9 13.3 2.0 15.3 2.3 8.0 10.5 33.5 15.4 11.7 8.3 24.3 28.1 6.7 1.8 18.6 17.5
11.5 11.5 11.5 11.0 3.1 10.3 2.1 6.6 8.6 34.0 15.8 12.2 9.0 21.1 35.0 4.4 1.2 19.1 18.6
10.3 10.3 10.3 9.8 3.9 13.4 1.8 5.9 7.5 32.9 15.7 12.3 9.1 21.0 40.0 4.6 1.3 18.9 19.8
9.1 9.1 9.1 8.7 4.9 11.0 1.6 5.0 6.3 32.3 15.8 12.5 9.1 21.4 45.0 4.1 1.2 19.0 21.0
Dividend payout policy increased from 25% to 35-40%, with managements intention to further raise it to 50%
18
Cashflow(MYRmn)
Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates
FY11 161 -58 -56 46 -40 6 0 0 0 0 -8 -1 0 0 -12 0 -20 -31 -33 81 48 108 FY12 190 -36 -61 93 -83 10 0 0 0 0 2 13 0 0 43 0 -10 33 46 48 94 99 FY13F 217 16 -94 138 -60 78 0 0 0 0 2 80 0 0 8 0 0 8 87 94 181 11 FY14F 240 -37 -96 106 -70 36 0 0 0 0 2 38 0 0 17 0 0 17 55 181 236 -21 FY15F 269 -23 -117 129 -70 59 0 0 0 0 3 62 0 0 23 0 0 23 85 236 321 -75 Notes
Balancesheet(MYRmn)
As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates
FY11 48 0 156 164 3 371 0 433 5 0 0 809 130 103 8 242 26 0 34 302 9 0 160 339 -2 497 809
FY12 94 0 217 149 5 464 0 514 5 0 0 984 155 115 9 278 38 0 50 366 13 0 160 448 -4 605 984
FY13F 181 0 195 179 5 561 0 525 5 0 0 1,091 146 139 9 294 46 0 50 390 14 0 160 530 -4 687 1,091
FY14F 236 0 218 209 5 667 0 543 5 0 0 1,216 153 153 9 315 63 0 50 428 16 0 160 615 -4 771 1,216
FY15F 321 0 243 232 5 801 0 556 5 0 0 1,362 160 178 9 347 86 0 50 483 19 0 160 703 -4 859 1,362
Notes
1.53 16.0
1.67 22.6
1.91 18.9
2.12 18.4
2.30 17.9
0.67 21.8
0.52 16.4
0.05 1.6
19
Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose.
As a result of the aforementioned changes, we revise our FY13F/FY14F earnings upwards by 2.7%/7.5%. We peg our revised FY14F EPS of 43.36sen to a 10x target one-year forward P/E, consistent with the industrys long-term average, arriving at TP of MYR4.35 with a Neutral rating. We cross-check our P/E-based TP with a 10-year DCF valuation with cashflows discounted back to June 2013, which provides an intrinsic value of MYR4.66 per share.
20
Higher dividend payout on the cards Kossan has increased its dividend payout policy from 25% to 35-40%, and intends to raise it further to 50%. On this note, we highlight that Kossans dividend yields of 3.04.9% from FY13F-FY15F are among the highest in the industry.
Fig. 28: Dividend yield Malaysian-listed glovemakers
FY13F Top Glove Supermax Kossan Hartalega *
Source: Nomura estimates
21
SUPM.KL SUCB MK
EQUITY RESEARCH
June 17, 2013 Rating Up from Reduce Target price Increased from 1.90 Closing price June 12, 2013 Potential upside
Neutral
MYR 2.15 MYR 1.95 +10.3%
Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus Our TP is 7% below consensus on expectations of compressed margins. We do not foresee significant downside to current levels as valuations seem undemanding for Supermax's size.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784
FY15F New
Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)
997 122 122 17.92c 17.0 10.9 8.7 1.6 1.7 15.2 18.6
1,200 130 130 19.17c 3.0 N/A N/A N/A N/A 14.4 22.9
1,216 132 132 19.40c 8.3 10.1 7.9 1.4 3.0 15.0 22.2
1,291 145 145 21.30c 11.1 N/A N/A N/A N/A 14.5 20.4
1,347 148 148 21.74c 12.1 9.0 7.2 1.3 3.3 15.1 21.1 N/A N/A N/A N/A
1,485 170 170 25.05c 15.3 7.8 6.2 1.2 3.9 15.6 16.8
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
20.4 15.1
Notes
12.7 12.7 12.7 12.4 3.3 23.5 0.9 10.4 12.5 19.8 11.2 8.8 10.2 7.2 21.2 3.7 1.6 14.3 12.0
10.9 10.9 10.9 10.6 1.7 8.1 1.6 8.7 10.1 26.4 14.7 12.3 12.2 11.6 18.2 6.9 2.8 15.2 13.1
10.1 10.1 10.1 9.8 3.0 10.6 1.4 7.9 9.4 23.3 13.5 11.0 10.8 12.2 30.0 7.9 3.1 15.0 13.7
9.0 9.0 9.0 8.7 3.3 13.5 1.3 7.2 8.5 22.8 13.3 11.0 11.0 13.0 30.0 4.5 1.9 15.1 13.9
7.8 7.8 7.8 7.6 3.9 9.4 1.2 6.2 7.2 22.8 13.9 11.6 11.5 14.0 30.0 4.0 1.8 15.6 14.7
Dividend payout revised by management to 30% from FY12 onwards; 20% previously
23
Cashflow(MYRmn)
Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates
FY11 114 -66 9 56 -38 18 -31 1 5 25 18 -27 0 -22 38 -11 7 97 104 226 FY12 147 31 -14 164 -69 94 18 0 2 -20 94 -12 0 -27 -37 -76 18 104 123 155 FY13F 164 -48 9 126 -96 30 -29 0 0 29 30 -40 0 24 -13 -29 1 123 124 206 FY14F 180 -52 -30 98 -60 38 -34 0 0 34 38 -44 0 -1 -13 -58 -20 124 104 217 FY15F 206 -30 -35 141 -60 81 -38 0 0 37 81 -51 0 -1 -13 -64 17 104 121 192 Notes
Significantly higher capex in FY13F for the additional 40 production lines which should increase NBR capacity by 5.4bn pcs pa
Balancesheet(MYRmn)
As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates
FY11 104 0 206 223 8 541 229 402 29 0 5 1,205 190 87 0 278 140 18 436 0 0 170 599 0 769 1,205
FY12 123 0 206 234 1 564 210 447 29 0 5 1,254 163 118 4 285 115 20 420 0 0 340 494 0 834 1,254
FY13F 124 0 250 213 1 588 239 512 29 0 5 1,373 190 93 4 288 139 20 447 0 0 340 586 0 926 1,373
FY14F 104 0 280 250 1 635 274 540 29 0 5 1,482 183 108 4 295 138 20 454 -1 0 340 689 0 1,029 1,482
FY15F 121 0 307 263 1 691 311 567 29 0 5 1,603 176 118 4 298 137 20 456 -1 0 340 808 0 1,148 1,603
Notes
Receivable, inventory and payable days include both manufacturing and distribution arms
1.95 7.2
1.98 14.0
2.04 10.4
2.15 11.6
2.32 13.7
1.99 29.4
1.06 18.6
1.25 22.2
1.21 21.1
0.93 16.8
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Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose.
However, taking into account the aforementioned changes, the estimated impact on our FY13F/FY14F earnings are rather negligible as we expect Supermax to share with its customers most of the cost savings via lower ASPs. As a result, we only tweak our FY13F/FY14F earnings estimates slightly upwards by 1.1%/1.9%. We peg our revised FY14F EPS of 21.74sen to a 10x target one-year forward P/E, consistent with the industrys long-term average, arriving at TP of MYR2.15. We also run a 10-year DCF valuation with cashflows discounted back to June 2013 as a sense check to our P/Ebased TP; we arrived at an intrinsic value of MYR2.07 per share via this methodology.
Fig. 30: Historical P/E band chart
MYR 5 4 3 2 1 0 Mar 06 14x 11x 8x 5x 2x Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 14 12 10 8 Mean = 7.7 6 4 2 0 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 -1SD = 5.7 +1SD = 9.7
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Nevertheless, alongside managements strategy of moving towards competitive pricing, we expect weaker margins for Supermax. While we expect raw material input prices to remain soft, we foresee Supermax sharing such cost savings with customers by adjusting ASPs downward in tandem with changes in raw material prices. We also believe that its distribution arm could stand as a liability to the group in the event of margin compression, as Supermax will likely have to absorb a larger proportion of the squeeze in margins, in our view. We thus opine that operationally, Supermax remains unattractive in the near-term, justifying our Neutral view of the stock.
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TPGC.KL TOPG MK
EQ U I T Y R E S E A R C H
June 17, 2013 Rating Remains Target price Increased from 5.65 Closing price June 12, 2013 Potential downside
Neutral
MYR 6.20 MYR 6.39 -3%
Anchor themes We expect healthy long-term demand outlook due to growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus Our FY14F earnings estimates and TP are in line with consensus.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784
Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)
2,314 203 203 32.74c 79.2 19.5 12.8 3.1 2.5 17.1
2,495 229 229 36.99c 13.2 N/A N/A N/A N/A 17.4
2,443 222 222 35.76c 9.2 17.9 10.9 2.9 2.8 16.9
2,809 255 255 41.22c 11.4 N/A N/A N/A N/A 17.7
2,743 255 255 40.92c 14.4 15.6 9.6 2.6 3.2 17.6
3,041 260 260 41.90c 1.7 N/A N/A N/A N/A 16.5
2,962 270 270 43.31c 5.9 14.8 8.8 2.4 3.4 17.0
net cash net cash net cash net cash net cash net cash net cash
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
-1.7 16.2 38.0 -6.2 15.3 40.2 -2.2 1,265.5 71.1 6.7/4.57 3.21 7.9 25.4
28.9 6.0
Notes
34.9 34.9 35.0 33.9 1.7 23.0 3.5 19.4 28.2 11.4 9.5 6.5 5.5 20.9 60.1 6.9 2.3 10.2 11.3
19.5 19.5 19.5 18.9 2.5 14.9 3.1 12.8 16.6 16.6 12.8 9.9 8.8 13.9 48.8 6.2 2.1 17.1 16.9
17.9 17.9 17.9 17.3 2.8 14.8 2.9 10.9 14.3 17.3 14.4 11.0 9.1 19.2 50.0 9.3 2.7 16.9 17.8
15.6 15.6 15.6 15.2 3.2 12.4 2.6 9.6 12.6 17.3 14.7 11.1 9.3 18.0 50.0 8.3 2.3 17.6 18.0
14.8 14.8 14.8 14.3 3.4 11.7 2.4 8.8 11.7 17.2 14.5 10.9 9.1 18.0 50.0 5.6 1.6 17.0 17.5
The 50% dividend payout policy is the highest among peers; there is potential for an upward revision in dividend payout, given the strong net cash position
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Cashflow(MYRmn)
Year-end 31 Aug EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates
FY11 196 -74 51 172 -141 31 -2 2 10 -66 -25 -88 1 -1 -2 -89 -114 263 149 -146 FY12 297 -32 0 266 -143 123 0 -7 -3 -11 102 -85 1 0 1 -84 18 149 167 -164 FY13F 353 -31 -54 268 -227 41 0 0 0 12 54 -111 1 0 7 -103 -50 167 117 -115 FY14F 402 -24 -57 322 -227 95 0 0 0 15 110 -127 1 0 7 -120 -9 117 108 -105 FY15F 431 -29 -60 342 -167 175 0 0 0 15 190 -135 1 0 7 -127 63 108 171 -168
Notes
Large capex going forward to account for rubber plantation and long-term capacity expansion plans
Balancesheet(MYRmn)
As at 31 Aug Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates
FY11 149 262 176 129 715 7 661 20 0 20 1,423 0 195 35 229 3 0 44 277 25 0 481 626 15 1,122 1,423
FY12 167 294 179 170 811 7 734 20 0 26 1,598 0 232 43 274 3 0 41 318 24 0 484 747 24 1,255 1,598
FY13F 117 311 193 170 791 7 878 20 0 26 1,722 0 231 43 273 3 0 41 317 28 0 491 861 24 1,377 1,722
FY14F 108 349 214 170 841 7 1,008 20 0 26 1,902 0 267 43 309 3 0 41 353 32 0 499 993 24 1,517 1,902
FY15F 171 377 233 170 951 7 1,067 20 0 26 2,072 0 285 43 328 3 0 41 371 36 0 507 1,133 24 1,664 2,072
Notes
Close to nil borrowings; strong net cash position to support potential upcoming M&A deals
3.12 na
2.95 na
2.89 na
2.72 na
2.90 na
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30
6 4 2 0 Jan 06
14x 11x 8x 5x
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
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Appendix A-1
Analyst Certification
I, Celeste Yap, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of MYR4.70 is pegged to a one-year forward P/E of 14.2x, on FY14F EPS of 33.04sen. Our 10-year DCF valuation, discounted back to June 2013 on a WACC of 7.6% and terminal growth of 2%, provides a fair value of MYR4.77. Risks that may impede the achievement of the target price Upside risks to our view include 1) new, significant capacity expansion plans which will continue to boost capacity and earnings, or innovative product types which could push up margins; 2) higher/lower-than-expected pass-on rates of cost inflation/savings; 3) faster-than-expected completion of its NGC expansion plans; and 4) further weakening of NBR raw material prices.
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For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We peg Kossans FY14F EPS of 43.36sen to target one-year forward P/E of 10.0x, which is the sector average since 2007, arriving at target price of MYR4.35. Our 10-year DCF valuation discounted back to June 2013, using WACC of 7.0% and terminal growth of 2%, gives us a fair value of MYR4.66. Risks that may impede the achievement of the target price Upside risks to our view include: 1) delay in industry expansion or sudden surge in demand; 2) higher/lower-than-expected pass-on rates of cost inflation/savings; and 3) better-than-expected earnings contribution from TRP segment. Downside risks to our view include: 1) an unexpected surge in latex prices, and; 2) expansion hiccups which would affect penetration into higher-end segments and market share growth.
Supermax Corp Bhd (SUCB MK)
Rating and target price chart (three year history) Date 09-Jan-13 09-Jan-13 21-May-12 13-Feb-12 19-Nov-11 19-Nov-11 27-Sep-11 Rating Reduce Target price Closing price 2.03 1.90 2.03 Not Rated 1.67 Suspended 2.09 Neutral 1.845 4.00 1.845 2.88 1.215
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We arrive at our target price of MYR2.15 by pegging FY14F EPS of 21.74sen to one-year forward P/E of 10.0x, which is the sector average since 2007. With a WACC of 9.0% and terminal growth of 2%, our 10-year DCF valuation discounted back to June 2013 provides a fair value of MYR2.07. Risks that may impede the achievement of the target price Upside risks include 1) higher/lower-than-expected pass-on rates of cost inflation/savings; 2) increased hygiene awareness in emerging markets like Brazil which Supermax already has large exposure to; and 3) major delays in expansion projects by other industry players or sudden surge in demand which will likely result in better pricing power for glovemakers. Downside risks include 1) an unexpected surge in latex prices, whereby
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cost inflation pass-on would likely see a lag; and 2) delays in its expansion plans which will stunt volume growth, resulting in flattish earnings growth.
Top Glove Corp (TOPG MK)
Rating and target price chart (three year history) Date 09-Jan-13 09-Jan-13 21-May-12 13-Feb-12 27-Sep-11 27-Sep-11 09-Mar-11 13-Dec-10 13-Dec-10 06-Oct-10 Rating Neutral Target price Closing price 5.57 5.65 5.57 Not Rated 4.10 Suspended 5.07 Reduce 4.07 3.42 4.07 5.00 4.89 Neutral 5.56 5.80 5.56 6.82 5.69
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We peg our FY14F EPS of 40.92sen to a 15.2x target multiple, its 3-year average, to arrive at our target price of MYR6.20. Our 10-year DCF valuation discounted back to June 2013 is based on a WACC of 8.8% and terminal growth of 2% and implies a fair value of MYR6.26. Risks that may impede the achievement of the target price Upside risks to our view include 1) stronger-than-expected demand from the Latin American and Asian markets, to which Top Glove has large exposure; and 2) synergistic acquisitions undertaken to contribute to cost-saving measures. Downside risks include 1) lower-than-expected ASPs as a result of pricing pressure from peers; 2) higher-than-expected raw material prices; and 3) expansion coming in at a slower pace than the projected c.4.8bn pieces per year, limiting volume growth.
Hartalega Holdings Kossan Rubber Industries Supermax Corp Bhd Top Glove Corp
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Target Price
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