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KUALA LUMPUR: AmInvestment Research maintains its call option in Mah Sing Group with a higher fair value of RM1.50 per 99 sen share, based on sum of parts (SOP) valuation.
“The increase in fair value is to reflect the contribution of the company’s glove manufacturing business in fiscal year 21,” he said in a research note on Friday.
AmInvest Research maintained its fiscal year 20 figures while raising its fiscal year 21 to year 22 net profit forecasts by 43% and 91%.
“We value the glove business at 25 times more than fiscal year 21 earnings, representing a 35 times discount on the glove industry’s PE. We believe the discount is justified as Mah Sing has no prior experience in the glove making business, ”he said.
Mah Sing proposed to venture into rubber glove manufacturing and health-related businesses. For phase one, the company plans to build 12 new glove production lines with an estimated total production capacity of up to 3.68 billion pieces of gloves per year, located in Kapar, Klang.
The capital expenditure for the start-up of phase 1 is RM150 thousand. The land is rented at RM 274,000 per month (as of November 1 this year) for three years with the option to renew it for four more 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 place 12 additional production lines with production similar to that of phase one. The glove manufacturing division will be led by a management team with more than 30 years of experience in the glove industry.
Mah Sing intends to gradually expand up to 100 glove production lines as part of the group’s future expansion plan.
“Based on our assumption of average selling price (ASP) of US $ 50 / 1,000 pieces (spot price), 80% average utilization rate, nitrile price of RM5.60 / kg and exchange rate of RM / US $ of RM4.25; the glove division will provide an additional net profit of RM51k and RM105k for FY21 and FY22 respectively.
“Therefore, we increased our net profit projections for fiscal years 21 and 22 by 43% and 91%, respectively. We believe that the spot price will be lower in fiscal year 21 (currently more than USD80 / 1,000 pieces) given the availability of the Covid-19 vaccine and the increase in glove supply as a result of the expansion of other glove manufacturers ” , He said.
However, management noted that the indicative orders received have exceeded their phase 1 and 2 capacity.
AmInvest Research believes that Mah Sing has the financial strength to enter the glove manufacturing business given its current strong cash flow position coupled with the new RM100mil convertible sukuk issue.
“After paying capex of RM 150K for phase 1, Mah Sing’s net gear will increase from 0.4% to 4.8%. Overall, we see this as a positive move by management given the good prospects in the glove business amid the Covid-19 pandemic.
“We believe that the demand for gloves will remain stable after covid19 due to increased awareness of healthcare and stricter regulations,” he said.
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