Singapore Gloves Sector - Maybank Kim Eng 2016-02-05: Strong results, remain positive

RIVERSTONE HOLDINGS LIMITED AP4.SI UG HEALTHCARE CORPORATION LTD 41A.SI

Singapore Gloves Sector - Strong results, remain positive

UG beat earnings, expect Riverstone to be in line 1H6/16 earnings of UG Healthcare beat our expectations, at 48% of FY16E.
Headline earnings grew 34% YoY, driven by capacity expansion, strong USD and low material prices.
After adjusting for forex gain, core earnings growth was 13% YoY and 67% QoQ, beating our 5-10% YoY growth forecast.

2H6/16 will be stronger as its new capacity of 0.4b gloves from phase 2 expansion will make a full contribution, vs 2 months contribution in 1H6/16.
As for Riverstone, which is scheduled to release its results on 24 Feb, we expect them to be within expectations. Core earnings growth for 4Q15 and FY15 should be more than 60%, driven similarly by capacity expansion, strong USD and low material prices.

Our channel checks with other Malaysian glove-makers suggest that extreme competition from major capacity expansion is unlikely in 2016.
Supermax, which rolled out the bulk of the industry’s new capacity in early 2016, continues to see strong demand.
Also, we note that a multinational company is closing down its factory in Thailand.
We believe the weak MYR, massive investments and growing scale of Malaysia’s glove-makers are helping them to gain market share from other glove producing nations.
For UG and Riverstone, management continues to see good demand for their new capacity in 2016.
Volatile swings in the USD/MYR due to government measures, oil-price movement and political developments in Malaysia have increased the share price volatility of listed glove-makers.
Our FX team expects USD/MYR to trade at an average price of 4.10 – 4.15 in 2016, implying that MYR should remain stable at the current level of 4.15.
In our earnings forecast, we have adopted a more conservative rate of 4.12.

The Malaysia government raised the natural gas price by 17% and foreign workers levy by 100% in Jan 2016.
Offsetting these is diesel price, which have fallen 29% in Feb 2016, from Dec 2015.
Our sensitivity analysis indicates that every 10% increase in energy costs will reduce earnings by 3% and vice versa.
For the foreign workers levy hike, we expect earnings for Riverstone and UG to fall by 0.5% and 1.5% respectively, assuming employers bear 50% of the hike.

We remain positive on the industry, given the continuous expansions and favourable trends in currency and material prices.
Maintain BUY on UG and Riverstone.
We raise UG’s TP to SGD0.52 from SGD0.41 after rolling over our base year to FY6/17, still based on 14x, 40% discount to peer average.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-05

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.30 Same 1.30

BUY Maintain BUY 0.52 Up 0.41