Careplus Group Berhad (Carepls - 0163) could be finally on a ripe moment to see potential M&A activities with bigger boys in the glove industry. It had been a known problem for Careplus in suffering from tight profit margin due to the lacking in economy of scale on their gloves production. However, the seremban based Careplus is still on expansion mode and looking to have 26 production line running in the 2nd half of 2016.
Malaysia being the largest gloves exporter in world dominates 40% of the market share from big established player such as Hartalega, Top Glove, Kossan and Supermax. Smaller player are Careplus, Comfort (Formerly known as IRCB) and Esceram.
With the bigger player continue to make aggressive expansion in order to protect market share, and smaller just surviving player fighting to combat with profit margin issue due to lack of economy of scale, it will be a ripe moment to see further consolidation in the Malaysian glove industry as this will create a synergy within them, benefiting each other.
As for Top Glove, they had been planning for quite some time on M&A activities as one of their expansion. To recap, Top Glove become where it is today is also attributed to multiple M&A with at least 20 other smaller gloves production company back then. According to Tan Sri Dr Lim Wee Chai, the group had shortlisted 3 local glove maker, and is eyeing to make at least 1 acquisition for the FYE 2016. The media quoted on Top Glove on making noticeable movement on 3rd Quarter 2016. The Star - Top Gloves eyes M&A by August
In FYE 2015, Careplus had raked in a total revenue of RM 190 million, with annual manufacturing capacity at 2.4 billion gloves per year. Top Glove current capacity span around 45 billion pieces per year. However, with the additional 6 lines that is to be added, Careplus is looking to see 3 billion gloves per year, which is almost 7% of what Top Glove produce a year.
The time is very ripe for Top Glove to make the first public move as cards as lay out. Now that Top Glove had successfully listed in SGX, Top Glove can use SGX as a platform for future public fund raising to enhance it's international presence.
Comparison between Esceram and Careplus
There had been news on Top gloves eyeing on Esceram as the group seek to diversified its product into gloves former as well. Esceram manufacture glove formers and examination gloves. For FYE 2015, Esceram total revenue is RM 30 million. Should Top Glove is willing to pay a RM 130 million for Esceram, that will put a steep valuation of 400% on based on it's latest revenue. Currently, Careplus is taking in a total revenue of RM 190 million for FYE 2015 and having a market capitalization of approx RM 137 million. Should all existing 88 million warrant be converted, Careplus will probably be seeing RM 165 million of market capitalization. Based on Esceram scale of valuation, Careplus could be looking at a value of RM 760 million.
According to familiar market sources, Top Glove is very close on putting a deal with Esceram, with offer probably priced between RM 130m to RM 140m. But that will not spell an end for Top Glove M&A activities as Careplus is just a few steps away. Market analyst will probably see Esceram dealing in 2016, and Careplus in 2017. However, the current valuation of Esceram in the market could be fully valued, leaving little space for investor for a huge gain in the M&A activities.
In the other hand, Careplus at the current price will be seeing a greater bargain for now. With director exercising their warrant at the price of RM 0.32, and Careplus being at the lowest price in the year, there space for future capital appreciation is very huge, imagine a future M&A that would carry a price tag of RM 760 million. The M&A for Careplus could probably see Top Glove using the SGX platform in making fund raising activities in the coming days.
After all, the synergy between Careplus and Top Glove will be better off for the 2, with 1 seeking for economies of scale in order to save cost, while the other seeking to maintain market share and expansion activities.
Technically seeing, Careplus is resting on strong support at the range of RM 0.32. The current pricing will be attractive for investor to lock in position to see future capital appreciation in related to future M&A activities.
Bone's TP : RM 0.6
CAREPLS (0163) - Careplus - Ripe to take position