While attention is being focused on the top four glove companies in Malaysia (Top Glove Corp Bhd, Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd), Latexx Partners Bhd has been quietly hatching an aggressive expansion plan. It currently produces 4.4 billion gloves a year and by year-end, the capacity will rise to six billion with the addition of eight new production equipment designed by Latexx. These state-of-the-art equipment are 120m long and each line, costing RM3.5 million, can produce 0.2 billion gloves a year.

Latexx was a struggling rubber glove company before Low Bok Tek rejoined it in September 2004 and bought shares from family members. He currently holds a 30.3% stake in the company. The going was tough initially as the company was short of funds and was making mainly powdered latex gloves, which had lower margins. The lack of credit also meant Latexx had to sell the rubber gloves for cash at low prices. It also took time for Low to cut costs, improve the production process and build credibility with customers. His efforts started to bear fruit in 2008 and profits blossomed in 1Q2009, with net profit for the period surging to RM9.1 million from only RM1.1 million in 1Q2008. The sharp increase in profit can be attributed to a rise in production — with annualised sales of four billion a year for 1Q2009 compared with 2.8 billion for the whole of 2008 — better cost and quality control, better product mix, lower latex prices and a strong US dollar.

Latexx is expected to post strong growth until 2012 as it ramps up its production capacity from four billion gloves a year to six billion by 2009, 7.5 billion by 2010 and nine billion by 2012. The company is confident of selling the additional gloves as it currently cannot meet all the demand from its customers. It also makes super thin nitrile gloves weighing only 4gm. The six new lines that will come into operation in 2009 are expected to cost RM21 million, while the additional 15 lines, scheduled for installation in 2010 and 2011, plus a new factory, will cost RM70 million. Latexx currently has a RM68.4 million loan, but with a strong cash flow, the company is being offered hire purchase rates of 6% to 7% compared with 12% on existing loans. Currently, the company has a net debt of RM48 million representing a reasonable net debt to equity of 37%. Some future financing may be required, but the bulk of the capital expenditure can be funded from internal cash flow.

The improvement in margins is also due to a better product mix as it shifts its mix from powdered latex gloves to powder-free latex and nitrile gloves. Currently, 60% of its production consists of powder-free latex gloves, while 20% each comes from powdered and nitrile gloves. Its new lines will be concentrating on powder-free and nitrile gloves, which enjoy better margins than powdered latex ones. The emphasis would be to grow its nitrile glove production.

Another reason for its good margin is that all its facilities are located in one site — Kamunting, Perak. This ensures greater efficiency arising from lower overheads and operational and supervision costs. Its tax rate should remain low for the next two to three years as it has unabsorbed tax losses and capital allowances totalling RM57.6 million as at Dec 31, 2008. This amount will be boosted by planned capital expenditure of around RM90 million from 2009 to 2011.

In terms of sales, 40% to 45% goes to the US, 20% to Europe and the balance to other regions. Its largest customer accounts for 20% of its sales, while another 20% goes to the second and third largest customers. Many of the larger glove companies in Malaysia derive a large proportion of business from their bigger customers. In a way, this represents a symbiotic relationship as large US customers are dependent on Malaysian rubber glove companies for regular supply and technical input. After all, around 60% of global rubber gloves are exported by Malaysian companies. In this respect, Malaysian rubber glove companies are the global leaders in their field.

Margins are relatively stable and should improve with economies of scale. Latexx has a formula that adjusts glove prices for changes in the foreign exchange rate and input costs like latex. The benefit from a weaker ringgit in 1Q2009 will be absent in 2Q2009; nevertheless, rubber glove prices are adjusted around two months after the movement in input costs and currency. Its pre-tax profit margin of 13% in 1Q2009 is the highest among major glove companies after that of Hartelega due to Hartelega’s higher percentage of high margin nitrile glove production.

Latexx’s prospective FY2009 PER of 6.7 times is the lowest among rubber glove companies after that of Supermax. Supermax’s production growth is slower and it is burdened by high gearing after writing off its investments in APL Industries. Latexx’s PER is relatively low despite the fact that it has the most aggressive production growth rate and among the highest margins in the glove industry. Rubber glove stocks look undervalued as most are trading below 10 times PER and earnings in the industry are resilient due to steadily rising demand from the healthcare industry.

Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company. KSC may own shares in some of the companies covered by the writer.



This article appeared in Capital page, The Edge Malaysia, Issue 757, June 1-7, 2009