Singapore Gloves Sector - Maybank Kim Eng 2016-03-22: Minimal impact from foreign workers levy hike & price swings

Singapore Gloves Sector - Maybank Kim Eng 2016-03-22: Minimal impact from foreign workers levy hike & price swings  RIVERSTONE HOLDINGS LIMITED AP4.SI  UG HEALTHCARE CORPORATION LTD 41A.SI 

Singapore Glove Sector - Minimal impact from foreign workers levy hike & price swings 

48% hike in foreign workers levy, down from 100% 

  • In response to employer’s outcry on its spike in foreign workers levy announced in Feb 2016, the Malaysia government has revised its levy increase for manufacturing workers to 48% or MYR600. This is lower than the 100% hike or MYR1,250 that was proposed earlier. 
  • The new levy will be effective from 18 Mar 2016. 

Insignificant earnings impact of 0.5-1.2% 

  • We estimate that the revised levy will have minimal impact on earnings of the Singapore-listed glovemakers. 
  • We expect net profit for Riverstone and UG to fall by 0.5% and 1.2% respectively, assuming corporates fully absorb the hike. 
  • Riverstone and UG employ 1,300 and 400 foreign workers, respectively. Currently, the levy is borne by the foreign workers and we understand that glove manufacturers have yet to decide whether the additional levy would be shared between employers and employees. 
  • We think the most likely scenario is a 50:50 split between employers and employees. 
  • We maintain our earnings forecasts for now. 

Limited impact from currency & raw materials swing 

  • USD has corrected against MYR by c.7% YTD. However, MYR is still 17% stronger YoY for 1Q16 but 2% weaker QoQ. Our USD/MYR assumption is 4.02 for FY16 against current USD/MYR 4.01. 
  • On the raw material front, butadiene and latex prices have increased 55% and 18% YTD, respectively. On a YoY/QoQ basis for 1Q16, Butadiene price is +33%/+33% firmer while latex prices are -4%/+4%. 
  • Management believes the spike in Butadiene price is temporary due to plant maintenance. In 2Q15, Butadiene price 67% QoQ hike resulted in Riverstone’s GP margin tightening 1.5ppt QoQ. The raw material price increase should be mitigated by additional revenue from c.25% new capacity and better economies of scale. 

Valuations remain attractive; maintain positive 

  • Riverstone and UG are both trading at more than 20% discount in forward P/E vs the Malaysia listed glovemakers, despite having comparable growth profile and ROE. 
  • We maintain our BUY calls on Riverstone and UG Healthcare with TPs of SGD1.18 and SGD0.52.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-03-22
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.18 Same 1.18
BUY Maintain BUY 0.52 Same 0.52