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KUALA LUMPUR (Nov 13): Salcon Bhd’s jump to the glove makers bandwagon received a tepid response from investors.
The water and wastewater engineering company, which announced its plan to diversify into the glove making business, saw its share price drop as much as 7.89% or three sen to 35 sen in early trading.
At 11.04 am, the counter settled at 36.5 sen, falling 1.5 sen or 3.95%. It saw 180.29 million shares change hands, making it one of the most traded stocks.
While the market reaction was tepid today, the share price has more than doubled from 18 sen at Oc 1.
Sharizan Rosely, an analyst at CGS-CIMB, said in a note today that Salcon’s decision to acquire a 51% stake in JR Engineering and Medical Technologies (JREMT), a manufacturer of gloves, for RM28.6 million was unexpected.
“With the new JREMT specific earnings stream, Salcon would potentially benefit from a significant recovery in earnings outlook from losses in [financial year 2020] as you diversify into a growth segment; however, we believe that execution risks could be a concern in the short term, “he said.
He maintains his call to downsize Salcon, as he feels the share price had recovered prior to the news.
“Despite the share placement dilution adjustment, the revalued net asset value (RNAV) target price increases to 32 sen as we impute the estimated earnings guarantee and link it to an RNAV discount of less than 40% (60 % before), “he said.
According to Salcon, the deal will be financed by RM22.5 million from private placement income and RM6.1 million from internal funds. The deal fully values JREMT at RM56 million.
The proposed acquisition comes with a profit guarantee of RM10 million per year for the next three financial years ending December 31, 2021 (FY21) through FY23.
“Based on FY10 / 20F annualized net profit (RM 2.5 million net profit in 9M20 as per M&A agreement announcement), this translates to 17x acquisition price / earnings ratio (PER) , which we consider fair, and within the average from 2020 to 2021 [PER] 15-22 times range for glove stocks under our coverage. The deal is expected to be completed by the end of 2020, “said Sharizan Rosely.
He also noted that the minimum profit guarantee of RM10 million per year (on the four existing lines) for fiscal year 21 to fiscal year 23 by JREMT should address potential execution risks.
“We estimate that the profit guarantee implies an average selling price (ASP) of US $ 40 to US $ 50 per 1,000 gloves, in line with the prevailing ASPs for nitrile and natural rubber gloves and based on a net profit margin of twenty%.
“For Salcon, this translates into an accumulation of earnings of RM5.1 million per year (51% share) versus our FY21-22F net profit of RM1.4 million and RM1.9 million,” he said.
Read also:
Salcon joins the glove manufacturers club and aims to produce three billion gloves a year
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