Mah Sing is proposing to undertake a proposed diversification to venture into glove manufacturing. Ideally, Mah Sing would be able to tap onto its expertise of its regional plastics business in order to synergise with this potential venture. Phase 1 (12 lines) of the expansion is targeted to be carried gradually over 2Q21 to 3Q21 while Phase 2 (12 lines) of the expansion is targeted to be carried gradually over 4Q21 to 1Q22. Capacity of the lines stand at 3.68bn pieces p.a. for each phases. Over the longer term, the Group intends to gradually expand up to 100 gloves production lines. We keep our forecasts unchanged for now and maintain BUY with an unchanged TP of RM0.85.

NEWSBREAK

Mah Sing is proposing to undertake a proposed diversification to venture into glove manufacturing. The Group will acquire initially 12 new gloves production lines which are expected to yield 38k pieces of gloves per production line per hour (or a total of 3.68bn pieces p.a.).

HLIB’s VIEW

Positive on the news. We remain positive on the news as this venture would help diversify Mah Sing’s earnings which is currently heavily reliant on the property market. The proposed diversification would enable the Group to take advantage of the glove business with positive long-term industry prospects and additional demand from the Covid-19 outbreak. Ideally, Mah Sing would be able to tap onto its expertise of its regional plastics business in order to synergize with this potential venture.

The plan. Mah Sing has entered into a tenancy agreement to occupy a land measuring 313.5k sqft with a single storey warehouse (229k sqft) together with a double storey office in Klang to commence its gloves business. Phase 1 is targeted to be carried out from 2Q21 to 3Q21, with a CAPEX of not more than RM150m. The Group’s target market for the exports are the US and Europe, amongst other countries. The plant will be located in Kapar, Klang, nearby the bigger players (Top Glove, Supermax, Kossan, and Smart Glove). Mah Sing is also planning for a Phase 2 of the expansion plan whereby an additional 12 new gloves production line will be located beside the aforementioned plant (providing an additional 3.68bn pieces p.a. to capacity) which will be carried out from 4Q21 to 1Q22. Over the longer term, the Group intends to gradually expand up to 100 glove production lines.

Potential earnings. Mah Sing has received letters of intent from numerous buyers (majority in the export market) for nitrile gloves of up to 9.41bn pieces, which will be sufficient to cater to its Phase 1 and 2 expansions. Sufficient supply for nitrile has been secured to cater to the Phase 1 lines. For illustrative purposes (looking into FY21), assuming a conservative net profit of USD15/1000 gloves, an exchange rate of MYR:USD 4:1, the 3.68bn production would generate c.RM110m of net profit. This amount is would add additional 83% to our current FY21 earnings forecast of RM136m. Note that the illustration assumes a conservative run rate pricing of USD45/1000 whereas spot prices are trading up to USD100/1000 gloves. By applying a conservative 15x PE, this implies an additional an RNAV/share of RM0.62/share in comparison to our current total estimate of RM2.14/share.

Challenges. The Group intends to obtain the FDA Certification (for exporting to the US) and CE Marking Certification (for exporting to the European region). Note that the Group has no prior experience in the glove business which includes the application for any medical certifications with local and foreign authorities for the sale of medical gloves. Nonetheless, the Group is confident in assembling a sufficient pool of talent with suitable technical expertise and is in the midst of liaising with authorities for the respective approvals. While venturing into an entirely new business could prove challenging, this is not the first time they have done so; back in the day Mah Sing’s core biz was plastics before it successfully embarked on property development.

Forecast. We keep our forecasts unchanged for now, pending further solidification in the plans. We note a potential upside to our FY21/22 earnings forecast.

Maintain BUY with an unchanged TP of RM0.85 based on an unchanged discount of 60% to a RNAV of RM2.14. Our buy call is premised upon its commendable take-up of recent launches, cover ratio of 1.1x to provide earnings visibility coupled with the positive sentiment associated with their foray into gloves. We see value in the stock as it is priced at a P/B valuation of 0.5x (-2SD of its 5-year mean), and is lower than its GFC trough of 0.68x. The focus on affordable products should garner strong responses (as seen in its recent launches) and dividend with a minimum payout ratio of 40% (FY20 yield: 3.2%, FY21 yield 4.3%) would hopefully serve as a support to share price.

Source: Hong Leong Investment Bank Research - 22 Oct 2020