INVESTMENT MERIT

An under-researched stock expected to get some attention. In our view, Ruberrex’s proposed entry into the booming nitrile gloves market is expected to change its fortunes and hence we are expecting a strong earnings turnaround. Rubberex’s appeal to investors lies in the following factors: (i) it is venturing into the booming nitrile gloves market through an acquisition, (ii) strong potential earnings turnaround from the acquisition, and (iii) based on our forecast, the stock is trading at 7.8x on FY14E EPS which is at a steep 48% discount to the rubber gloves sector PER average of 14.8x.

Acquisition to drive FY14 earnings growth. In a bid to enhance group margin and cashing in the booming nitrile gloves market, Rubberex had on Sept 2013 proposed to acquire a 100% stake in Alliance Rubber Sdn Bhd (Alliance Rubber) for RM113m cash. We consider the pricing which is at 9x FY12 net profit of RM13m to be reasonable. Upon completion of the acquisition by 1Q14, for illustrative purposes, Rubberex’s earnings is expected to jump by RM9.8m (taking account nine-month contributions of FY12 net profit and assuming flat growth). Alliance Rubber currently has installed nitrile gloves capacity of 2.7b pieces p.a. operating at 60-65% utilisation rate. We expect utilisation to ramp up to 80% on the back of booming demand for nitrile gloves.

Vinyl gloves a victim of industry aggressive expansion. The aggressive expansion of the vinyl gloves industry has resulted in an oversupply situation which led to unhealthy competitive pressure resulting in lower average selling prices (ASPs) further aggravated by rising labour costs in China. This resulted in a tough operating environment where the players are barely making profits and Rubberex is no exception. Due to competitive pressure causing low ASPs and utilisation rate, Rubberex’s vinly gloves operations register a loss of RM0.6m and RM 1.6m in 2Q13 and 3Q13 respectively. However, efforts are in place to at least get its vinyl segment back to profitability two to three quarters henceforth.

9M13 barely profitable, look into FY14, demand for vinyl is recovering. 9MFY13 net profit came in at only RM0.5m due to slower demand which was exacerbated by higher input cost for the vinyl gloves comprising mainly plastic resins and plasticizer and the oversupply situation of which we understand is abating. 3Q13 turnover rose 18% to RM91.9m QoQ, indicating demand is recovering. Overall demand for the Group’s products, especially disposable gloves have improved and selling prices have also stabilized in 3Q13.

Rationalising operations. We take comfort from management that efforts are already in place to put the company back to profitability in subsequent quarters. Some of the effort put in place includes : (i) installating various automation processes in order to reduce reliance on manual workforce, including auto stripping and automated carton packaging, (ii) strengthening the sales team, (iii) consolidating and centralising processes to reduce duplication of jobs, and (iv) reducing overall labour cost by 15%.

Trading Buy with an upside potential of 33%. We forecast FY14 and FY15 net profits of RM23m and RM28m taking into account (i) acquisition of Alliance Rubber; (i) rasing utilisation rate from 65% to 85% in Alliance Rubber due to the booming nitrile gloves segment, and (iii) the bottoming out of the vinyl gloves market and conservative single digit growth in household and industrial gloves market. We recommend a Trading Buy and a Target Price of RM1.08 based on 10.5x FY14 EPS (at a 30% discount to the sector average 14.8x FY14 PER due to its small market capitalisation).

SWOT ANALYSIS

Strength: Solid management.

Weaknesses: In the lower margins vinyl market.

Opportunities: Booming demand for nitrile gloves.

Threats: Changes in economic conditions

TECHNICALS

R1/R2: RM0.830/RM0.885, S1/S2: RM0.775/RM0.750

Comments: Momentum is picking up as the share price has surged up to retest the overhead resistance @RM0.830, where a breakout above the level could attract more buying interest to extend the up-cycle towards RM0.880 and RM0.940 next.

BUSINESS OVERVIEW

Rubberex Corporation (M) Bhd (Rubberex) started operations in Ipoh in 1986 as a household rubber glove manufacturer which later expanded into industrial gloves. In 1997, it was listed on the 2nd Board of Bursa Malaysia, after which it migrated to the Main Board in 2005. In the same year, the company ventured into China to expand its product range to include PVC gloves, which are now only manufactured at its plant in China, which stands on a 39-acre site. In 2006, it ventured into the production and sales of latex condoms, with a total annual production capacity of 140 million pieces at its plant in Malaysia. The China plant is situated in Buluo, Huizhou City, Guangdong province on 140,000 sq. m land area, for the production of reusable synthetic gloves & disposable vinyl gloves while the Malaysian plant is located in Ipoh on 70,000 sq. m land area.

BUSINESS SEGMENTS

The group offers a wide range of services as below:

By segments, vinly gloves accounts for approximately 60% to the revenue of Rubberex. The other 40% comes from household and industrial gloves. Rubberex exports to Europe, US/North America, Russia/Eastern bloc countries and Asia.

Source: Kenanga