Forex woes are also a key threat.
Price swings and workers levies are no cause for concern to Singapore-listed glovemakers, according to a report by Maybank Kim Eng.
In response to employers’ concerns, the Malaysian government recently slashed foreign workers levy to MYR600. This translates to a minimal impact on earnings of Singapore-listed glovemakers with net profit for Riverstone and UG Healthcare seen to dip by a meagre 0.5% and 1.2% respectively, assuming corporates fully absorb the hike.
Further, both companies currently employ 1,300 and 400 workers respectively. The levy is currently borne by the workers, and glove manufacturers have yet to decide whether the additional levy would be shared between employers and employees. Maybank posits, though, the most likely scenario is a 50:50 split between the two parties.
Singapore-listed glovemakers will also see limited impact from currency and raw materials price swings. USD has corrected against MYR by about 7% year-to-date (YTD), but MYR is still 17% stronger YoY for 1Q16 but 2% weaker QoQ. Maybank’s USD/MYR estimate stands at 4.02 for FY16 against the current USD/MYR 4.01.
As for raw materials, butadiene and latex prices have skyrocketed 55% and 18% YTD respectively. On a YoY/QoQ basis for the first quarter of 2016, butadiene price is +33%/+33%, which is temporary due to plant maintenance, while latex prices are -4%/+4%.
In 2Q15, butadiene price spiked 67% QoQ, which led to Riverstone’s GP margin tightening 1.5ppt QoQ. Maybank asserts that the increase in raw material price should be mitigated by additional revenue from around 25% new capacity, as well as improved economies of scale.
Overall, valuations for Riverstone and UG remain attractive. Both are trading at more than 20% discount in forward P/E versus Malaysia-listed glovemakers, despite having comparable growth profile and ROE.
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