Is GKent late in the glove game?
WHILE the global glove shortage is expected to sustain until 2023, one wonders whether George Kent (M) Bhd’s (GKent) recently-announced entry into glove manufacturing is late in the game.
The new venture, in collaboration with Johan Holdings Bhd, would see the commercial rollout of its first glove production line in August 2021, but it would take until mid-2023 for all 42 production lines to be commissioned as planned.
GKent is heading into glove-making business at a time when average selling prices of gloves are expected to soften in subsequent quarters, albeit at a slow pace, and there would be increased incoming supply into the market, considering that many companies have jumped on the glove bandwagon last year.
China-based glove players have also been aggressively ramping up their production capacity and this, to an extent, raises concerns on how long the glove shortage can be sustained.
However, GKent believes that the new glove business would be “sustainable in both good and crisis times, scalable worldwide, and recession-proof”.
It also says that the recurring income from glove manufacturing will contribute substantially to the group’s bottom line “for years to come”.
Analysts, on the other hand, have mixed views on GKent’s venture into glove manufacturing.
According to Kenanga Research, the group may see many hurdles ahead.
“First of all, with no track record in the business, we think that its guided commencement within the next five months or August is overly optimistic with many glove vendors or installers already being tied up with existing players for expansion
“Furthermore, with borders still closed, we think it would be hard to source skilled foreign workers familiar with the trade.
“Coupled with the acute shortage in raw materials supply chain, procurement of key materials could also be a challenge, ” it says in an earlier note.
The research house further adds that with glove prices already trending down, by the time GKent’s first line is operational, it would no longer make economic sense for the group or its partner to plough in further financial resources.
On March 29, GKent said it has been invited by Johan to buy a 40% stake in the latter’s subsidiary, Dynacare Sdn Bhd, for RM40mil.
Both GKent and Johan have the same major shareholder, Tan Sri Tan Kay Hock.
GKent’s proposed venture into glove manufacturing and the deal to acquire 40% interest in Dynacare require the approval from its shareholders.
RHB Research Institute is positive on the new development, pointing out that it will diversify GKent’s earnings base.
Not only that, considering that GKent has also been given the right to undertake the construction of the glove manufacturing plant with a contract value of RM624.1mil, the research house has raised its earnings forecasts.
“We lift core earnings forecasts for the financial years of 2022 to 2024 by 6%, 14% and 8% following the new contracts secured, ” it says.
In a reply to StarBizWeek, GKent chairman Tan Sri Tan Kay Hock says the contract is timely and will immediately contribute to the Group’s bottom line over the next two years.
He also points out that GKent will participate in Dynacare only at the board level and not actively in the management team.
“Our participation in this venture is not a knee-jerk reaction.
“The board’s decision is based on an extensive and in-depth study by Frost & Sullivan that demonstrated the long-term viability of the glove business.
“The consideration has taken into account the additional glove manufacturing capacity coming on stream in the next five years, which will be offset against the continuing strong demand due, in part, to improving domestic and global healthcare services, international stockpiling efforts, ageing populations and stricter workplace safety requirements, ” Tan says.
Tan also says that GKent will work with experienced glove-dipping-line technology providers to deliver high-capacity, fully automated production lines.
“The group expects to expand its glove manufacturing facility construction business locally and internationally.
“This business will be an area of growth for GKent as existing and new glove manufacturing players expand their production capacity in the coming years, ” according to him.
When asked whether GKent would consider expanding into other areas of healthcare-related products apart from gloves, Tan says Dynacare plans to offer a range of personal protective equipment “as and when suitable opportunities arise”.
He also does not rule out the possibility of GKent undertaking merger and acquisition deals in healthcare-related areas in the future, although the immediate and medium-term focus will be on its water metering and engineering businesses.
“The prospects for our metering business’ growth are bright. Demand for our water meters will continue to increase due to new installations.
“We are also introducing smart meters to our existing as well as new markets, ” he says.
Looking ahead, Tan says GKent plans to expand its metering business in Vietnam and the Philippines, which offer the biggest growth potential.
“We are also expanding into more markets in Greater Asia.
“In addition, we are investing substantial resources to raise productivity and improve the efficiency of our production line through automation and new machinery, ” he adds.
In the latest quarter ended Jan 31, the group’s net profit more than doubled year-on-year (y-o-y), led by stronger water meters sales and higher joint-venture contribution.
It posted a net profit of RM14.29mil in the Nov 2020-Jan 2021 period as compared to RM6.76mil in the same quarter a year earlier.
Meanwhile, revenue rose by 6.59% y-o-y to RM87.83mil.
GKent said the demand for its water meters globally continues to outpace production capacity.
The metering segment’s gross profit margin in the quarter ended Jan 31 increased due to higher pricing, sales mix and lower cost of material.
Commenting on the group’s engineering segment, which offers construction and infrastructure services, Tan says the revenue contribution from the segment would only return to pre-Covid-19 levels when the pandemic is no longer a serious threat.
“In the past year, progress of our construction projects were affected by the movement control order and the need to adhere strictly to the government’s standard operating procedures, ” he says.
Currently, the engineering segment’s orderbook size stands at RM3.7bil, while the tenderbook is valued at RM700mil.
Moving forward, Tan says the government’s drive to improve the country’s rail transportation and water infrastructure would be a major catalyst for the group.
“Our project teams are following up closely on tenders we submitted, as well as new opportunities for various projects in these sectors.
“Also, if approved by shareholders, our bottom line will benefit from the construction of Dynacare’s glove manufacturing plant, ” he adds.