Investment Highlights

• We maintain our BUY call on Mah Sing Group (Mah Sing) with a higher fair value of RM1.50 per share (from RM0.99), based on SOP valuation (Exhibit 4). The increase in fair value is to reflect the contribution from the company’s glove manufacturing business in FY21. We make no changes to our FY20 numbers while raising FY21-FY22 net earnings forecasts by 43% and 91%. We value the glove business at 25x over FY21 earnings which is a discount over the glove sector PE of 35x. We believe the discount is justified as Mah Sing has no prior experience in glove manufacturing business.
• Mah Sing proposed to venture into rubber glove manufacturing and healthcare related business. For phase 1, 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 at Kapar, Klang (Exhibit 1). Capex for commissioning phase 1 is RM150mil. The land is rented at RM274k per month (from 1 November 2020) for 3 years with an option to renew for further four terms. Mah Sing has the first right of refusal to purchase the land at market price if the landlord intends to sell the land during the term of the tenancy agreement.
• The first 6 lines are scheduled to commence production in 2QCY21 while the remaining 6 lines are expected to commence in 3QCY2021 (Exhibit 2). The second phase will put 12 additional production lines with similar output as phase 1. 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 USD50/1,000 pieces (spot price), 80% average utilisation rate, nitrile price of RM5.60/kg and MYR/USD 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 >USD80/1,000 pieces) given the availability of covid19 vaccine and increase in glove supply as a result of expansion by other glove manufacturers. Nonetheless, management noted that indicative orders received has exceeded its phase 1 and 2 capacity (Exhibit 3).
• We believe 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 covid19 pandemic. We believe the demand of glove will remain stable post-covid19 due to increase in healthcare awareness and more stringent regulations. We maintain our BUY recommendation on Mah Sing with a fair value of RM1.50.

Source: AmInvest Research - 16 Oct 2020