Mahsing has unveiled their new venture – MS Gloves, which will have the capacity to produce 3.68b gloves/annum by September 2021. We are positive on the move as glove ASPs are expected to remain elevated through 2022 due to supply tightness – allowing Mahsing to achieve a quick payback of 1.5-2 years on their capex of c.RM150m. FY21E earnings +RM84m (or 75%) to RM196m. Upgrade to OP with a higher SoP derived TP of RM1.05.

MS Gloves – Mahsing’s next growth engine. Mahsing has officially announced that they will be entering the glove manufacturing space by investing c.RM150m into 12 brand new lines, allowing them to produce 3.68b pieces/annum. Timeline-wise, the 12 lines will come online from April to Sep-21 at a rate of 2 new lines/month which we find rather quick.

Optional Phase 2. Should the global glove demand still persist after September 2021, Mahsing has the option to add on another 12 lines (phase 2) from Oct-21 to March-22; bringing cumulative production capacity to 7.35b pieces/annum. Currently, Mahsing has obtained letter of intents indicating demand of up to 9.41b pieces/annum.

Positive on the venture. With the anticipated global demand for gloves to remain elevated while supply continues to play catch up, we think that Mahsing’s venture into the glove industry is not too late. Our in-house view is that the glove supply tightness will remain even until end of 2022, keeping ASPs high – and providing the means for Mahsing to achieve a payback period of 1.5-2 years.

As compared to other new entrants (from other industries) that intend to penetrate this space, we believe Mahsing’s balance sheet size coupled with their existing experience within the plastic manufacturing industry would provide them the edge to jumpstart operations quicker and more competitively.

Supernormal growth in FY21. We upgrade FY21 earnings by RM84m (or 75%) to RM196m after incorporating the new stream of earnings derived from its glove segment. We have assumed ASPs of USD55/1000 gloves and have conservatively assumed Mahsing to only sell its first batch of gloves in July-21 (instead of April where lines are up) due to potential teething issues (refer to schedule behind). Costing wise, while management guided for USD25-27/1000 gloves, we have also conservatively assumed USD30/1000 gloves as they might have to pay premiums to obtain part supplies (ie formers) amidst this shortage.

Upgrade to Outperform with higher SoP derived TP of RM1.05 (from RM0.70). With the new segment, we switch our valuation method to Sum-of-Parts (from 0.53x FY21 PBV) whereby we value the new gloves segment within the SoP at 10x FY21 PER. We choose to only apply a PE of 10x for the division vs the 18.4x average PE ascribed to our big 4 coverage (Topglov, Harta, Kossan and Supermx) given the huge difference in capacity sizes, industry experience and also the fact that Mahsing’s operations have not come on stream yet – which could face start up hiccups.

Source: Kenanga Research - 16 Oct 2020