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Singapore Investment


RHB raises earnings projections, target price to RM3 for Rubberex
3-4 minutes

KUALA LUMPUR (Nov 5): RHB Investment Bank Bhd has maintained its "buy" call for Rubberex Corp (M) Bhd with a higher target price (TP) of RM3 (from RM2.20), or a 32% upside with about 2% yield forecasted for the financial year ending Dec 31, 2020 (FY20F), as the research house expects the glove maker to book strong earnings for the third quarter ended Sept 30, 2020 (3QFY20).

The research house said this is due to the group’s higher-than-expected average selling prices (ASPs). Besides, the TP implies 9.8 times FY21F price-earnings (PE), a 45% discount to peers' average, reflecting its smaller market cap and liquidity.

RHB's Alan Lim said in a note today: “We expect Rubberex to announce its 3QFY20 results by the end of the month. In view of its high glove ASPs in July to September, its 3QFY20 earnings should double q-o-q (quarter-on-quarter) and surge more than 10 times y-o-y (year-on-year)."

Lim said the research house had lifted Rubberex’s FY21F-23F core earnings by 48%-136% on higher ASP assumptions.

The research house is forecasting a net profit of RM255 million with a revenue of RM687 million for FY21, while for FY22, it is forecasting a net profit of RM175 million with a revenue of RM584 million for Rubberex.

Lim added: “Based on the results and outlook shared by Hartalega Holdings Bhd  ('buy'; TP: RM23.50) and Supermax Corp Bhd ('buy'; TP: RM13.25) — after both companies reported their earnings in October — we may have underestimated the quantum of ASP increases. This is due to a worse-than-expected rate of Covid-19 infections globally, and a shortage of nitrile butadiene (a raw material used to manufacture nitrile gloves).

As for Rubberex, Lim said nitrile gloves accounted for about 45% of the group’s FY19 revenue, and the research house expects this to increase to 80% for FY21.

Furthermore, Lim noted that Rubberex had completed building its new factory, and it is in the final round of trial runs to optimise the production process.

“We expect earnings contributions from the new factory to start in December, so its 4QFY20 earnings should be much better q-o-q.

“For the nitrile glove segment, Rubberex’s capacity will increase 150% to 2.5 billion ppa, from one billion ppa currently, once the factory is ready in December,” said Lim.

“The biggest downside risk is a safe and effective Covid-19 vaccine being made available globally faster than expected. Other risks: Lower-than-expected sales volume/USD (a worse US dollar exchange rate) and higher-than-estimated raw material prices,” he said.

At the time of writing today, shares in Rubberex had risen eight sen or 3.51% to RM2.36, bringing its market capitalisation to RM1.96 billion. Some 3.27 million shares changed hands.


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