Gkent and Johan (40:60) are venturing into the glove business with plans to produce 12b gloves/annum by 2023. Gkent will be building the RM624m plant with its first line of gloves ready by Aug 2021. We are negative on this venture as we think that they are late to the game and would also face many start-up and operational issues. Coupled with the downward trending glove price, their plans (for 42 lines) are likely to be thwarted halfway. Up FY22-23E earnings by 2% each but keep UP with unchanged TP of RM0.56.

Another glove player in town. Gkent together with its sister* company Johan (at a 40:60 equity split) is venturing into the glove business under the entity Dynacare with 42 planned lines (or 12b capacity/annum) scheduled over the next two years.

*TS Tan Kay Hock being the common major shareholder of Gkent and Johan owns an effective 40% stake in Gkent and 60% in Johan.

Timeline. Dynacare’s first line of gloves will tentatively commence production in Aug-2021; with a total of six lines planned by Dec 2021. The remaining 36 lines would gradually come online in CY22 and CY23. Gkent will be recognizing Dynacare as an associate post-injecting RM40m of funds for its 40% stake.

Gkent will be the contractor of the RM624m plant located in Perak. Note that the 17.7acre land where the factory would be constructed on was purchased at a price tag of RM27.3m. The land currently has five open-sided factories already being erected upon.

Our take. We are negative over Gkent’s entry into the glove business as we opine that they are too late to the game with many hurdles ahead. First of all, with no track record in the business, we think that its guided commencement within the next five months (i.e. August) is overly optimistic with many glove vendors/installers already being tied up with existing players for expansion.

Bottle-neck issues. Furthermore, with borders still closed, we think it would be hard to source skilled foreign workers familiar with the trade. Note that one glove line operating three shifts/day (at 8 hour/shift) requires c.100 workers. Coupled with the acute shortage in raw materials supply chain, procurement of key materials could also be a challenge.

Declining glove prices should deter further capex allocation. Last but not least, with glove prices already trending down, we think that by the time Gkent’s first line is operational (tentatively in 1QCY22 on our assumptions), it would no longer make economic sense for Dynacare to plough in further financial resources.

Earnings. Despite the massive plans, we choose to omit out potential glove contributions for now and only impute in RM50m of the RM624m construction replenishment into our estimates as we foresee Dynacare not following through with the entire contract sum. Note that because Dynacare is a 40% associate, Gkent can only recognize 60% of the construction profits (i.e. 60% unrelated interest in Dynacare). Consequently, FY22-FY23E earnings are up by 2% each.

Maintain UNDERPERFORM with unchanged TP of RM0.56 on unchanged FY22E PBV of 0.55x (-1SD below mean).

Source: Kenanga Research - 30 Mar 2021