We reiterate our OVERWEIGHT weighting on the sector as cost and forex headwinds have brought down CY12 P/E to just 7.2x or 43% below the KLCI’s 12.7x P/E. This is despite the sector’s solid 3-year EPS CAGR of 16%, which is well supported by the 8-10% annual global demand growth. Also, demand is underpinned by structural trends such as improving hygiene standards in Asia and US healthcare reform.
We expect the eventual moderation of latex prices to trigger a re-rating of the sector. Other potential catalysts are
1) increased outsourcing by MNCs,
2) the impact of price increases in the quarters ahead assuming no major adverse rubber or currency trends, and
3) takeover speculation surrounding small-cap glovemakers.
We make no changes to our earnings numbers or target prices. All the glovemakers under coverage remain Outperforms, with Hartalega being the top pick.
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