KUALA LUMPUR (July 7): Rubber processor and trader Seng Fong Holdings Bhd’s share price dipped below its 75 sen initial public offering (IPO) price on Main Market debut on Thursday (July 7).

Seng Fong’s shares opened at 74 sen and subsequently fell as low as 66.5 sen, down 11% from its IPO price. The stock later recouped some losses and settled 7.5 sen or 10% lower at 67.5 sen on its maiden trading day, for a market capitalisation of RM350.3 million. A total of 97.59 million shares were traded.

The decline contrasts with several recent listings which saw positive debuts, including Orgabio Holdings Bhd, which closed 9.7% above its IPO price of 31 sen on its first day of trading, as well as SFP Tech, which saw a whopping 123% increase in its share price during its debut.

Other new listings which ended their first day of trading below their IPO price include YX Precious Metal Bhd (down 3.6%) and Unitrade Industries Bhd (down 6.3%).

Despite the lacklustre share price performance, the group said it foresees increased demand for rubber in view of rising automotive sales as the global economy continues to recover from the lingering effects of the Covid-19 pandemic.

Seng Fong non-independent executive director Jimmy Er Tzer Nam said that as the global economy continues its recovery after the Covid-19 pandemic ends, demand for automotive vehicles and tyres is set to increase.

“Approximately 70% of global natural rubber is used for tyre manufacturing. Block rubber is the main material for tyre manufacturing, which is thereby driven by the automotive industry. We are of the view that the Covid-19 damage is likely to diminish in the near future, and as a result we expect the global economy to recover, which will likely boost sales of automotives and tyres.

“With the increase in vehicle production and sales of automotives, as well as replacement of worn-out tyres, demand for tyres is expected to increase and consequently demand for block rubber will also increase as well,” he said.

For the third quarter ended March 31, 2022 (3QFY22), Seng Fong logged a net profit of RM13.37 million on a quarterly revenue of RM261.94 million.

For the cumulative nine-month period ended March 31, 2022 (9MFY22), the rubber processor and trader of Standard Malaysian Rubber (SMR) Grade and Premium Grade block rubber posted a net profit of RM31.32 million on revenue of RM662.43 million.

Seng Fong posted a net profit of RM34.62 million for FY21, versus RM12.74 million for FY20 and RM14.35 million for FY19. Its FY21 net profit was supported by revenue of RM768.17 million, compared with RM616.43 million for FY20 and RM636.83 million for FY19.

Seng Fong chief financial officer Philip Tan Se Shir noted that the boost in 9MFY22 earnings was underpinned by an increase in gross sales of its premium grade rubber mainly due to increased demand from the tyre manufacturing industry.

He added that the company plans to utilise its initial public offering (IPO) proceeds to part-finance the expansion of its annual production capacity by 17% to 166,000 tonnes by 2023, from 142,000 tonnes currently, to meet the expected further increase in demand for Premium Grade block rubber from the tyre manufacturing industry.

Meanwhile, Tan said that Seng Fong’s cost-plus business model enables the company to pass on higher raw material costs by accordingly increasing prices of its rubber products.

“We apply a cost-plus [business] model — we are selling at a premium and buying at a discount. Any increase in the purchase price of raw material will be passed on to our customers, therefore the selling price moves in tandem with our purchase price of the raw material,” he said.

In a note on Thursday, Hong Leong Investment Bank Research ascribed a fair value (FV) of RM1 to Seng Fong and said the company is currently optimising its capacity by 16.9% driven by increasing demand from China — the world’s largest vehicle market.

“We take comfort in Seng Fong’s cost-plus business model, protecting its gross margin from increasing raw material and distributional costs.

“We derive an FV of RM1 for Seng Fong, based on 11 times FY23 price-earnings ratio, given its healthy balance sheet, stable business model, earnings growth and attractive dividend yield," the research house said.