We remain positive Mah Sing’s venture into the gloves business as it diversifies its earnings base from being reliant towards the property market which is experiencing a slowdown. Ideally, Mah Sing would be able to tap onto its expertise and know-how of its regional plastics business in order to synergize with this potential venture. We increase our FY21/22 forecasts by +47.6%/+63.4% respectively as we now impute the earnings impact of the glove venture into our estimates, while lowering our FY20 earnings forecast by -10.3%. Maintain BUY with a higher TP of RM1.41 (from RM0.85) as we now value the company based on a SOP derived valuation.
Positive on glove venture. We remain positive Mah Sing’s venture into the gloves business as it would not only help insulate Mah Sing’s revenue stream from the downturn in the property market but also allows the company to ride on the increased global demand in gloves moving forward.
Well established manufacturer. The manufacturing and exports business is not new to Mah Sing. In fact, Mah Sing has over 40 years of experience in this business since it first started as a Plastics Trading business back in 1965. The sales breakdown of its operations in Malaysia comprises of 60% local and 40% export to over 45 countries (top 5 export markets include Singapore, Thailand, Indonesia, Vietnam and Philippines). Meanwhile, its Indonesian operation (65%-owned subsidiary) caters to clients such as Mercedes Benz, Nissan, Suzuki, Mitsubishi, Daihatsu, and Panasonic. We were made to understand that the process flow for the gloves business is rather much similar to that of the plastics business with the only difference being gloves requiring a dipping process as opposed to plastics requiring an injection moulding process. Ideally, Mah Sing would be able to tap onto its expertise and know-how of its regional plastics business in order to synergize with this potential venture.
Proposed expansion. To recap, Mah Sing has proposed 2 phases in its initial venture, with each phase comprising of 12 new gloves production lines yielding 38k pieces of gloves per production line per hour (or a total of 3.68bn pieces p.a.). The installations will be carried out at c.2 lines per month from Apr 2021 to Sep 2021 (Phase 1) and Oct 2021 to Mar 2022 (Phase 2). The CAPEX for Phase 1 is estimated to be no more than RM150m, whereby our pro-forma net gearing is implied to increase to 0.28x from 0.24x as of 2QFY20 (assuming perpetual securities are treated as debt). In the long run, the Group intends to gradually expand up to 100 glove production lines. Note that management as already received letters of intent from various buyers for nitrile gloves of up to 9.41bn pieces, which should more than sufficiently cater to its planned production lines.
Forecast. We increase our FY21/22 forecasts by +47.6%/+63.4% respectively as we now impute the earnings impact of the glove venture into our estimates. Note that our forecasts may see an upside as it currently assumes a conservative net profit of c.USD15/USD5 per 1000/gloves for FY21/22 with an exchanged rate of MYR: USD of 4:1 coupled with operations commencing only in Jul 2021 as opposed to the guided timeline of Apr 2021. While we raise FY21/22 earnings to account for contribution from the gloves venture, we also take this opportunity to tone down FY20 projections by - 10.3% (given uncertainty following the spiking Covid-19 cases of late).
Maintain BUY with a higher TP of RM1.41 (from RM0.85) as we now value the company based on a SOP derived valuation to reflect the venture into gloves. Our BUY call is premised upon its commendable take-up of recent launches, cover ratio of 1.1x to provide earnings visibility, minimum dividend payout ratio of 40% coupled with its venture into gloves, which will will provide a meaningful boost to earnings in FY21/22 after taking into account its contributions.
Source: Hong Leong Investment Bank Research - 20 Oct 2020