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Mergers and acquisitions (M&As) are expected to remain a prominent feature in the local natural rubber (NR) glove industry this year. Over the past one year, the number of NR glove companies declined from 50 previously to an estimated 42 players now, as a result of M&As.
If this pace continues, eventually result in only 20 large players in operation.
By Hanim Adnan
MERGERS and acquisitions (M&As) are expected to remain a prominent feature in the local natural rubber (NR) glove industry this year.
Over the past one year, the number of NR glove companies declined from 50 previously to an estimated 42 players now, as a result of M&As.
Of the current players, more than 80% are operating at an installed capacity of less than two billion pieces per annum, according to industry observers and analysts.
An observer told StarBiz that there was likely to be more M&As this year, and the second phase of consolidation would eventually result in only 20 large players in operation.
 | The rubber glove industry has been affected by rising oil and latex prices. |
“I believe smaller players which are operating at an annual installed capacity of less than 700 million pieces will likely be acquired or forced out of business by the bigger and more efficient players,” he opined.
He said if this occurred, the current production of about 10.5 billion pieces of gloves per year could be disrupted. That figure represented 68% of the top five manufacturers' planned capacity expansion for this year and about 65% of global demand, he added.
“As rubber gloves increasingly become a commodity, size does matter where economies of scale are instrumental in ensuring competitiveness,” he said.
Avenue Securities analyst Keith Wee said the excitement this year would be potential M&As involving leading players like Top Glove Corp Bhd and Kossan Rubber Industries Bhd.
“We understand that Top Glove and Kossan are seriously considering the possibility of M&As to further enhance their businesses,” he said.
The brokerage's top stock pick in the sector is Top Glove – the world's largest NR glove producer – while other preferred choices by consensus are Kossan and surgical glove maker Adventa Bhd.
Efforts to reach Top Glove officials during the past few days were unsuccessful.
Wee said some investors would argue that the current valuations of the industry were expensive compared with other commodity players, which were mostly trading at single-digit earnings multiples.
“However, we believe rubber glove stocks deserve a premium rating, given their steady financial track record, defensive business profile and robust earnings outlook,” he added.
Risks faced by local NR glove manufacturers include higher fuel costs due to lower government subsidies on natural gas, tight supply of latex, appreciation of ringgit against the US dollar and synthetic rubber substitute with no protein allergy, which is a cheaper option.
According to Wee, Malaysian rubber glove players are well positioned on the world map.
The local glove companies have registered exponential growth, benefiting mainly from the disruption in supply due to consolidation and rising trend in outsourcing from multinational companies as well as steady global demand.
“Top Glove and Kossan are expected to register stronger two-year earnings growth of more than 30% against the five-year historical compounded annual growth rate of more than 25%,” Wee said.
He does not expect the glove industry to slow down “anytime soon” based on the capacity expansion of 30% to 40% per annum over the next two to three years.
In the first half of last year, about 37 billion pieces of gloves were exported, compared with 24.2 billion pieces a year earlier. This represented a staggering 52.8% year-on-year growth, Wee noted.
Correspondingly, Malaysia's market share of disposable NR gloves increased to 62% last year from 55% in 2004.
Wee said imports of disposable examination NR medical gloves from Malaysia grew 13.5% in 2004, and there was an increasing trend over the years in the US, Malaysia's single largest export destination.
Malaysian Rubber Glove Manufacturers Association president K.H. Oon recently said NR prices were expected to stay high as demand exceeded supply.
Given the 25% jump in NR latex prices to RM4.75 currently from RM3.97 in June last year, he said most local rubber glove makers were increasing prices by RM7.50 per 1,000 pieces across the board.
“It is unavoidable (to increase the price) as gains in efficiency and productivity are slowing down,” he explained.
He said rubber glove manufacturers had tried their best not to pass on cost increases to customers.
“However, their hope for a reversal in the upward trend of latex prices and other costs during the second half of last year did not materialise,” said Oon. |
