WHILE there is scepticism over the viability of new players entering rubber glove manufacturing, Johan Holdings Bhd reckons it has a strategy to make a success out of the business.
This includes, among others, building a new state-of-the-art facility that complies with all environment, social and governance (ESG) issues and using the latest technology which not only reduces the labour headcount but also enables it to achieve economies of scale to reduce production costs.
That, in turn, will help it fight the competition that is growing, considering the huge number of new entrants into the rubber glove industry.
On Monday, Johan shareholders voted in favour of the company’s proposal to venture into the manufacture, sale and distribution of gloves. That entails spending some RM27.3mil for a piece of land in Lumut, Perak, to put up the plant. Approval was also secured for a rights issue to fund the construction of the plant, which is estimated at a whopping RM624mil.
The rights issue, priced at 10 sen a share and on the basis of one rights share for every two Johan shares held, will raise some RM38.9mil. The rights also come with a free warrant for every one rights share subscribed.
One interesting aspect of the new glove venture is that it will entail the participation of sister company George Kent (M) Bhd, which will invest RM40mil for a 40% stake in Dynacare Sdn Bhd, the wholly owned subsidiary of Johan that is embarking on the glove venture.
George Kent will also construct the plant on a design-and-build contract from Dynacare.
Johan will also use some of its own money as well as new borrowings to finance the building of the rubber glove plant.
Seasoned businessman Tan Sri Tan Kay Hock is the controlling shareholder of both companies.
Tan points out that George Kent is a well-established engineering construction company, having recently completed the Ampang Line Extension LRT2 and is executing with a partner the RM11.5bil LRT3.
“George Kent will be holding its EGM on June 8 and if approved, the glove venture will have the joint financial resources of both Johan and George Kent, ” Tan says.
While George Kent is a profitable entity, whose business entails water metering and an engineering segment that offers construction and infrastructure services, Johan has been loss-making for some time. It is disposing of its core Diners Club business to a party in Singapore. However, it should be noted that the disposal will not bring any fresh cash into Johan, as the proceeds are being used to net off receivables owned by Johan to the Diners Club businesses being sold.
It is understood that with the shareholder approval for the new glove venture, Johan can proceed to dispose of its Diners Club and embark on the new venture without having to fall into the status of becoming a cash shell without any core business. Based on its latest quarterly report, Johan had RM93mil in cash and loans and borrowings of RM80mil.
Johan’s share price has been hovering around 14 sen a piece for the last two months.
It is left to be seen if investors get excited about the new venture that Johan is embarking on and be willing to participate in the rights issue.
However, Tan points out that 99.9% votes were secured at the recent Johan EGM. “It is heartening to receive such overwhelming support for the rights issue and for the glove venture. I am putting my money where my mouth is by undertaking to subscribe fully for all my shareholding totalling 60.67%. The rest of the rights issue has been underwritten by a premier institution, ” explains Tan.
Tan, who had earlier told StarBizWeek that Johan’s glove venture had come about after studying over 100 different investment proposals for the company, says the venture will be “very interesting” for the shareholders of the company.
“Johan has conducted its feasibility study and sensitivity analysis. We have taken into account all possible scenarios of the market. It shows that even if the ASPs (average selling prices) of rubber gloves go back to the pre-pandemic levels, Johan’s glove venture will still be viable, ” Tan says.
Phoon Hee Yau, who heads the operations for Dynacare, adds that “on a best estimate, Johan expects to achieve payback on the investment incurred within 25 months from the commencement of commercial production”.
To recap, Dynacare’s plan is to build 42 automated production lines with double-former-dipping machines to manufacture examination and surgical gloves, targeting to produce 12 billion pieces of gloves per year.
The commercial rollout of its first glove production line is targeted for August 2021, while it would take until mid-2023 for all 42 production lines to be commissioned as planned.
“This will place Johan in the top 10 ranking by production capacity among the gloves manufacturer, ” says Phoon.
Phoon adds that being a new player in the scene, “Dynacare will have the advantage of incorporating the latest and best available technology which will provide us with the highest efficiency, productivity and meeting the highest quality product in the industry”.
It’s ESG focus will be an advantage, he says.
“As this is a greenfield development, Dynacare is able to institutionalise industry-leading ESG standards from inception, ” he points out.
This includes using solar energy with natural lighting and ventilation and advanced water treatment and recycling systems.
“Located within our compound is a modern centralised living quarters, thoughtfully designed with en suite bathrooms and lockers, comfortable and safe bedrooms as well as recreational facilities and amenities for our workers’ rest and relaxation.
“We have designed our building to comply with not just local regulations but also the International Labour Organisation’s recommended specifications, ” says Phoon.
Adds Tan: “The board of directors of Johan believe in the long-term viability of the business, hence the plan to establish 42 lines from the get-go. This plan enables Dynacare to reap valuable economies of scale, ensuring that with each additional line installed, per unit costs will reduce. The lower cost structure helps in ensuring the viability of the project even at pre-Covid ASPs.”
Tan points out that on an annualised basis, the sales from the 12 billion pieces of gloves will translate into a revenue of more than RM2bil for Dynacare.
“In my 40 year business career, I have not come across a project which has buyers knocking on our doors even before we start production. This is all very exciting, ” he says.
It should be noted though that glove companies currently trade at single-digit price-earnings ratios. But the reason for that is because the glove companies are reporting super normal profits, thanks to the surge in demand at the height of the pandemic. The market does not think that such profits will continue, going forward.
Still, in Johan’s case, it is starting the business from scratch and if successful, a new valuation could be attached to the company, based on the profits it will be able to generate from it.
Says Tan: “This project is very exciting for me personally and should be for shareholders because we are starting from a loss position. Thus any earnings for Johan Holdings, even if it is one ringgit, will enhance the performance of the company”.