#Hot Stocks* Rubber glove stocks rise on positive news flow

KUALA LUMPUR (Jan 11): Shares of rubber glove manufacturers advanced on Friday, fuelled by news of a potential revision to Malaysia’s minimum wage policy (MWP) and anticipation of higher glove demand due to rising influenza cases during the northern hemisphere’s winter season.

At 12.30pm today, Top Glove Corp Bhd had reduced gains to trade at RM5.44, with 600,000 shares done, after rising as much as eight sen or 1.5% to RM5.55 earlier.

Supermax Corp Bhd, which had gained as much as seven sen or 3.5% to RM2.08, settled at RM2.05 at the lunch break. The stock saw 1.6 million shares transacted.

Kossan Rubber Industries Bhd was up as much as 0.3% to RM3.47 before trading at a low of RM3.45 at 12.30pm, with about 38,000 units done.

Alliance Research Sdn Bhd analyst Ian Wan said rubber glove producers with a higher dependence on manual labour are expected to gain from the proposed revision of the MWP. The biggest beneficiary is likely to be Top Glove followed by Supermax, Kossan and Hartalega Holdings Bhd.

Separately, Wan expects the world flu season which began in November 2012 to be a positive catalyst for the glove sector. According to news reports in the US, the country had reported 88 flu-related deaths as at Jan 10. The total included 18 children, the report indicated.

Wan said in a note: "While the sector is fuelled by continuous positive news flow, we keep our earnings forecasts unchanged now, pending the formal announcement on the revision to the MWP by the government."

Alliance which has 'trading buy' calls for Top Glove, Supermax and Hartalega, recommends a 'buy' for Kossan, which is the research firm’s top pick for the sector. The research house has a target price of RM6.13 for Top Glove and RM2.29 for Supermax, while Hartalega and Kossan are deemed fairly valued at RM5.26 and RM4.09 respectively, according to the analyst. This compares with Alliance’s 'overweight' call for the sector.

The MWP, the first ever to be introduced in the country, was implemented on Jan 1 this year. The scheme requires private sector employers in Peninsular Malaysia to pay a minimum monthly salary of RM900 to their workers while companies in Sabah and Sarawak will have to adhere to a floor wage of RM800.

Industry players said their labour cost may increase by 50% annually with the implementation of the policy. They said prior to the implementation, every factory employee already earned RM1,200 a month, including overtime pay. A 50% increase would translate into RM1,800 per worker, according to them.

Recent news reports have indicated that the Cabinet has directed the Human Resource Ministry to draft fresh guidelines for the MWP to include various allowances for workers’ accommodation and transport expenses.

Alliance’s Wan said the development is positive for the glove fraternity as it is still a labour-intensive sector despite the recent adoption of automation by players. The analyst expects market concerns over rising labour expenses for glove producers to ease when the government makes a formal announcement on the revised MWP, possibly by the end of January.

"We had earlier projected a neutral impact from the MWP as we expected glovemakers to significantly mitigate any incremental labour cost with productivity gain from automation as well as higher selling prices by passing on the cost increase to their customers. Thus, we believe the latest development on MWP would turn out to be a positive catalyst for the glove industry, as we foresee cost savings from automation will likely flow directly to the bottom line, instead of being offset by higher wages," Wan said.

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