Glove maker’s share price up 33% on strong US dollar
GLOVE makers are back in the limelight, riding on a strong US dollar vis-à-vis the ringgit. This week, glove stocks staged another “mini rally”, as the ringgit weakened beyond the crucial level of 3.80 against the US dollar for the first time since the US-dollar peg was removed 10 years ago.
A firmer greenback is a boon to the export-oriented glove manufacturing sector and the prospects of higher industry earnings have enhanced the appeal of this class of stocks.
For Integrated Rubber Corp Bhd (IRCB), whose share price is up by some 33% year-to-date, there is another “catalyst”. Come Monday, the smallish glove manufacturer will exit the Practice Note 17 (PN17) category after the market regulator approved its early upliftment.
According to a filing with Bursa Malaysia, with the completion of IRCB’s regularisation plan, the company has regularised its financial condition and no longer triggers any of the PN17 criteria.
“After due consideration of all the facts and circumstances, Bursa Securities has decided to approve the company’s application for an early upliftment from being classified as a PN17 company, effective from 9am on July 13,” the company said in a statement yesterday.
According to the listing requirements, it needed to chalk up two consecutive quarters of net profit to exit PN17 after having completed its regularisation plan in early-November last year.
IRCB chairman Lim Boon Huat, when contacted, said that IRCB has turned around and is now on better financial footing. “We are stronger, yet at the same time, nimble,” he tells StarBizWeek.
Perak-based IRCB, which manufactures and sells powdered and powder-free natural rubber latex and nitrile examination gloves, made a net profit of RM4.09mil in its first quarter ended April 30. This is a 14-fold increase from the RM286,000 achieved in the same quarter a year earlier.
Its business has also expanded, with revenue having risen close to 45% to RM52.58mil. The company is also close to being debt-free, with only short-term borrowings of RM2.09mil on its balance sheet, while cash stood at RM9.08mil as at end-April.
Before this quarter, which was the fourth quarter for its financial year ended Jan 31, 2015 (FY15), IRCB had made a net profit of RM2.67mil.
IRCB returned to the black in FY15 with a profit of RM4.26mil from a net-loss of RM19.54mil a year earlier.
Lim says the company spent much of the past 1½ years putting its house in order, following the entry of two new substantial shareholders - Cheang Phoy Ken and Keen Setup Sdn Bhd.
Cheang, who was formerly the owner of delisted glove producer Seal Polymer Industries Bhd, is the single-largest shareholder with a 26.83% stake in the company today.
He was part of a new management team seeking to turn around IRCB. Keen Setup, meanwhile, has a 15.82% interest.
The company had slipped into losses from 2011. A year later, the main-market listed stock was classified as PN17 after its unit, Comfort Rubber Gloves Industries Sdn Bhd (CRG), defaulted on RM71mil worth of debt obligations. The new shareholders pumped in around RM44mil to revive the company and settle its debts.
Going forward, Lim says IRCB is readying itself in the next one to two years to meet an expected increase in demand for examination gloves.
Early this year, the company installed four new production lines, bringing the total production lines that are fully running to 29, housed in its two manufacturing plants in Taiping, Perak. From here, two billion pieces of gloves are produced in a year, which accounts for about 1% of the global market share.
According to its 2015 annual report, IRCB spent RM18mil for the construction and commissioning of new dipping lines, plus the construction of a new chemical compounding and storage facility. This expansion increased its output of gloves by 30%.
IRCB’s new machine lines and improvements in operational efficiency have enhanced its gross profit margin from 5% to 12%.
But it has also got a boost from the depreciation of the ringgit against the US dollar. The bulk of gloves, mostly for use in hospitals, nursing homes, industrial plants and food-handling processes, are exported. Conversely, the input costs are in ringgit terms.
To expand its geographical presence, Lim says that IRCB is exploring opportunities in developing countries, where it hopes to leverage on its nimbleness to customise products suitable for these markets. Currently, it is present in key developed markets such as Europe, the United States and Australia.
One thing for sure is that competition is set to intensify, as the big glove makers vie for market share with their expansion plans back on track. This may inevitably push selling prices of nitrile gloves down. But Lim reckons that small players like IRCB can “carve a niche”, given that it is able to accommodate custom-made orders from customers, which the big boys may often be unable to do.
To signal the new chapter in its corporate history, the company is proposing to change its name to Comfort Gloves Bhd , which would require shareholders’ approval during its next EGM. It believes this branding has a record of longevity, given that it is the key operating unit. By consolidating the branding, it hopes to improve visibility and marketability of the group.
But lessons elsewhere have shown that it takes more than that to sustain growth, This is where real test will come under the management of Cheang.
Recall that this would be the second name-change for IRCB. The company was once known as Berjuntai Tin Dredging Bhd and had adopted the present name in 2004 when it diversified into the synthetic and natural rubber glove industry a year earlier with the acquisition of CRG.
The stock has piqued investor interest. Its share price has more than doubled over a one-year period when the market regulator gave its nod for the regularisation plan. The stock closed 1.16% up to 87 sen yesterday with a market capitalisation of RM373.1mil. At this price, it is trading at a price earnings ratio of 44.8 times.