Gloves to provide maiden returns for Mah Sing in Q2 next year
PETALING JAYA: Mah Sing Group Bhd’s maiden profit contribution from its foray into glove manufacturing is expected to be realised by the second quarter of next year, with production set to commence by April 2021.
KAF Equities Research in a note said the “litmus test” to capitalise the stock and reverse market scepticism on the diversification will be in earnings deliverance.
“Management aims to start glove production in April 2021 with two production lines. Thereafter, two additional lines would be added monthly until it reaches 12 lines of production, with an annual capacity of 3.6 billion pieces in September 2021.”
The research house noted that the Malaysia Rubber Gloves Manufacturers Association expects global glove demand to grow at 20%, 25% and 15% in 2020,2021 and 2022 respectively.
“Pre-Covid, annual growth in global glove demand was in the range of 8% to 10%. Currently, the spot selling price for gloves is in the range of US$80 (RM330) to US$160 (RM666) per 1,000 pieces, with an estimated cost of around US$25 (RM104) to US$27 (RM112) per 1,000 pieces.
“The top four glove producers in Malaysia had an average selling price exceeding US$100 (RM416) per 1,000 pieces. This translates to a hefty margin, exceeding 60%.”
However, taking a conservative approach, KAF Equities Research assumes that Mah Sing will have an average selling price (ASP) of US$60 (RM250) per 1,000 pieces with an estimated cost of US$40 (RM167) per 1,000 pieces.
“Our ASP is on a blended basis, after taking into consideration the spot price, longer-term contracted price and mixture of nitrile and latex products. Our cost also factors in the production time loss in the first year of operation, higher raw material prices and higher cost in recruiting key personnel.
“This translates to an earnings before interest and taxes margin of around 40% and a net margin of 30%. All in, we expect a net profit of RM119mil from its gloves business with a total production of two billion pieces of gloves in 2021.” In view of a potential Covid-19 vaccine, it said Mah Sing’s management admits that the outlook (post-pandemic) would be different for the glove business.