Of all the listed rubber glove makers that have enjoyed renewed investor interest in recent weeks, Rubberex Corp (M) Bhd sticks out for a few reasons.
For one, it remains the lowest valued.
Trading at a historical price earnings multiple of a mere five times, it seems the cheapest of the lot, considering that year to date, shares of rubber glove companies listed on Bursa Malaysia have risen by some 20%.
But perhaps the comparatively low valuation ascribed to Rubberex is because of this fact - it is largely seen as an industry glove maker, whereas the big boys such as Top Glove Corp Bhd and Hartalega Holdings Bhd are in the business of making medical gloves whose demand has surged in light of the outbreak of the coronavirus, which is climbing across China and beyond.
That though is not entirely correct, points out the managing director of the Ipoh-based company, Khoo Chin Leng.
According to Khoo, aside from household and industrial gloves, the company also makes nitrile disposable gloves, which are used by practitioners in the medical field.
Not only that, orders for those items are surging and Rubberex has firm plans for capacity expansion to produce more of those products, thanks to monies that came in recently from the sale of a loss-making plant in China.“We have received significant orders and queries for our nitrile disposable gloves in recent weeks. Our production lines are running at maximum capacities to meet this increased demand, ” Khoo tells StarBizweek via email. He adds that at present, the company’s plant is able to churn out approximately one billion pieces of nitrile disposable gloves per year. “However, when our latest phase of expansion comes on-stream by June or July 2020, the installed capacity would increase by another 1.5 billion pieces a year, ” the 60-year accountant shares.
According to him, the company currently has orders in hand exceeding six months of full capacity. It is considering further factory expansion in 2021 if business is good.
Since selling its China manufacturing operations in late 2018, Rubberex has turned its focus on its Malaysian plant in Bercham, particularly in nitrile disposable gloves, which Khoo says garner “higher margins.”
The China operations were sold for HK$135.0mil (RM71.6mil), which was a discount of about one-third to the carrying value of the asset stated in FY17.
However, it was no longer viable due to new regulations by the Chinese government. The operations weighed down on the company’s profitability, which has been on a decline after peaking at RM21mil in FY16.
The China factory was mainly involved in the manufacture and sale of vinyl disposable gloves. Its operations had to be unexpectedly stopped in September 2018 when the new regulations took effect, resulting in the division recognising a loss of RM60.8mil in the financial year ending Dec 31,2018 (FY18). In that year, Rubberex was only able to reach a pre-tax profit of RM6.8mil and an earnings per share of 4.33 sen – its lowest in the last four years.“Operating conditions were challenging in China with stringent environmental regulations and competition from other glove producers in the country, ” Khoo recalls, adding that the disposal was completed in the third quarter of FY19.
“We expect a turnaround now with the China operations sold and diversion of financial resources back to Malaysia, especially in nitrile disposable gloves.”
Going forward, Rubberex intends to become a “significant player” in the nitrile disposable glove segment. Towards this end, it will continue to increase its market share next year and beyond, says Khoo.
“Upon completion of the latest phase of expansion in the middle of this year, the total installed annual capacity would be 2.5 billion pieces of gloves, which is a substantial increase from one billion pieces in 2019, ” he shares. According to him, the aim is to double-up its annual installed capacity to five billion pieces by 2023 with an average annual revenue growth rate of 25%. Nitrile disposable gloves is expected to account some 45% to group revenue in the current FY19, as compared to 17% in 2017 and 24% in 2018. By 2023, the company hopes to raise the contribution to 80%. But with peers also ramping up production lines, competition with surely be stiff, often resulting in price war to attract new customers.
Khoo contends that while Rubberex may not have the economies of scale like the big boys of the industry, he is confident the planned expansion would enable it to become a more competitive player.
“We have been in glove manufacturing for more than 30 years, including 15 years in China. So we have established a close relationship with many of our customers.
“In Malaysia, our nitrile disposable glove plant has been operating for less than five years, so our production lines and machineries are relatively new and up-to-date in terms of technology and automation.”
An analyst says that the company can gear up further given its strong balance sheet that has RM60.55mil in cash versus a debt of RM57.98mil as at end September last year.
And if needed, it can perhaps call on its major shareholder to do so, as was the case about two years ago when it sought to expand its production lines for nitrile disposable gloves. The company’s major shareholder is MedBumikar Mara Sdn Bhd - the private vehicle that counts government agency Majlis Amanah Rakyat and several seasoned businessmen as shareholders including Rubberex’s chairman, Datuk Abdul Rahim Abdul Halim.
MedBumikar Mara, which holds a 26.69% in the company, is also the controlling shareholder of MBM Resources Bhd, which in turn controls profitable carmaker Perusahaan Otomobil Kedua Sdn Bhd (Perodua).
The private company shot into the limelight in 2018 when it rejected UMW Holdings Bhd’s offer to acquire MBM because the price was unattractive and involved legal and structure complexity. The corporate exercise was later aborted.
Rubberex’s other substantial shareholders are Duvest Holdings Sdn Bhd and Aun Huat & Brothers Sdn Bhd, which own 9.54% and 10% respectively. Shares of the company closed at 60.5 sen yesterday. For the third quarter ended Sep 30,2019, it made a net profit of RM3.11mil, while for the nine-month period profit stood at RM7.47mil.
About 95% its products are exported to over 100 countries around the world with the main markets being Europe, North America and Asia. The company also has a subsidiary in Spain to service some of its biggest customers there. The unit also facilitates the distribution of its gloves around Europe.
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