- Positive signs from 1H14 earnings recovery. Rubberex Corporation (M) Berhad (Rubberex)’s 2Q14 net profit came in at RM3.1m compared to RM2.9m in 1Q14 bringing 1H14 net profit to RM6m due to better product mix and improved overall margins. The better overall profitability was largely due: to (i) the focus on margins and forgoing volume and (ii) lower raw material costs, including latex and resin. Vinyl gloves from China are also recovering from the worldwide over-supply situation and were stable in 2014 – from a loss situation in its China operations in 2013. Rubberex’s vinyl division is back in the black in 1H14. In the meantime, efforts which have been put in place over the past quarters to bring the company back to higher profitability are bearing fruits. Some of the efforts put in place include: (i) installing 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%.

- Dampened by the aborted acquisition of Alliance Rubber... However, the aborted proposed acquisition by mutual consent of the glove business and entire production facilities, including plant, machinery, equipment, land and buildings of Alliance Rubber Products Sdn Bhd, which mainly produces nitrile gloves for a total consideration of RM113m was a dampener to our earnings forecasts of which our investment thesis was premised upon.

- …but new nitrile plant to drive growth. Following the aborted acquisition of Alliance Rubber, which is involved in the production of nittrile gloves, Rubberex has started building its own nitrile gloves production lines. Plans are already underway to build 10 lines at their existing plant in Ipoh with an aggregate capacity of 1.1b pieces of nitrile gloves p.a. costing an estimated RM25-30m to be funded via internal funds and borrowings. We understand that the commercial production will come on-stream gradually by end Dec

2014. For illustrative purposes, assuming 8% net profit, ASPs of RM90/1000 pieces and utilisation rate of 80%, this new capacity could generate a total net profit of RM6.3m.

- Target price cut to RM0.67 but stock rating downgraded to NOT RATED from TRADING BUY due to low liquidity and interest on the stock. The stock is currently trading at an undemanding PER of 10.2x and 8.4x on FY14 EPS and FY15 EPS, respectively. Taking into account the abandoned acquisition and slower-than-expected contributions from the new plant, we are cutting our FY14E and FY15E net profit by 30%-40%. Correspondingly, we cut our target price from RM1.08 to RM0.67 based on 9x FY15 EPS (at a 40% discount to the sector average as due to its small market capitalisation). The saving grace is a 4% dividend yield at current market price.

Source: Kenanga