KUALA LUMPUR: AmInvestment Research is maintaining its Buy call on Mah Sing Group with a higher fair value of RM1.50 per share from 99 sen, based on sum-of-parts (SOP) valuation.
“The increase in fair value is to reflect the contribution from the company’s glove manufacturing business in FY21, ” it said in a research note on Friday.
AmInvest Research maintained its FY20 numbers while raising FY21-FY22 net earnings forecasts by 43% and 91%.
“We value the glove business at 25 times over FY21 earnings which is a discount over the glove sector PE of 35 times. We believe the discount is justified as Mah Sing has no prior experience in glove manufacturing business, ” it said.
Mah Sing proposed to venture into rubber glove manufacturing and healthcare related business. For phase one, the company is planning to build 12 new gloves production lines with an estimated total production capacity of up to 3.68bil pieces of gloves per annum, located in Kapar, Klang.
Capex for commissioning phase 1 is RM150mil. The land is rented at RM274,000 per month (from Nov 1 this year) for three years with an option to renew for further four terms.
The first six lines are scheduled to start production in 2QCY21 while the remaining six lines are expected to start in 3QCY2021.
The second phase will put 12 additional production lines with similar output as phase one. The glove making division will lead by a management team with more than 30 years of experience in the glove industry.
Mah Sing intends to gradually expand up to 100 gloves production lines as part of the group’s future expansion plan.
“Based on our average selling price (ASP) assumption of US$50/1,000 pieces (spot price), 80% average utilisation rate, nitrile price of RM5.60/kg and RM/US$ exchange rate of RM4.25; the glove division will provide additional net profit of RM51mil and RM105mil for FY21 and FY22 respectively.
“Hence, we increase our FY21 and FY22 net profit forecasts by 43% and 91% respectively. We believe the spot price to be lower in FY21 (presently more than USD80/1,000 pieces) given the availability of Covid-19 vaccine and increase in glove supply as a result of expansion by other glove manufacturers, ” it said.
Nonetheless, management noted that indicative orders received has exceeded its phase 1 and 2 capacity.
AmInvest Research believes Mah Sing has the financial strength to venture into the glove manufacturing business given its current strong cashflow position coupled with the new issuance of RM100mil convertible sukuk.
“After paying RM150mil capex for phase 1, Mah Sing’s net gearing will increase from 0.4% to 4.8%. All in all, we see this is a positive move by the management given the good prospects in glove business amid the Covid-19 pandemic.
“We believe the demand of glove will remain stable post-covid19 due to increase in healthcare awareness and more stringent regulations, ” it said.
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