Tuesday, 23 February 2010

Latexx's successful ongoing expansion plan should ensure strong growth for FY2010 and FY 2011.

Latexx CEO Low Bok Tek revealed an aggressive expansion plan to boost the company's rubber glove capacity in May 2009.

Planned targets were:
  • beginning of 2009 - 4 billion pieces per year
  • end of 2009 - 6 billion pieces per year
  • end of 2010 - 7.5 billion pieces per year
  • 2012 - 9 billion pieces per year.
Present targets:
  • Latexx completed 3 double former lines at its newly built Plant 1 before Chinese New Year, increasing capacity to 6.6 billion from 6 billion at the end of 2009.
  • Additional lines will be added to Plant 1 to up capacity to 9 billion pieces a year by the end of 2010 - 2 years ahead of target.
Latexx was successful in clinching new multinational customers to take up the 3 billion pieces a year capacity at Plant 1 even before it was completed.
  • In 2008, it sold 2.68 billion pieces.
  • It sold 3.82 billion pieces in 2009, 43% more than 2008.
  • In Q4 2008, Latexx sold 750 million pieces.
  • In Q4 2009 alone, Latexx sold 1.15 billion pieces.
All of Latexx's plants are located on a 50-acre site in Kamunting, Perak.  Latexx still has 12 acres of unutilised land to build plants 7 and 8.  Each plant has the capacity to produce 3 billion pieces of gloves a year.
  • Plant 7 has already been cleared, which could boost its capacity by another 3 billion to 12 billion by the end of 2011.
Although the lines can be used for the production of both nitrile and natural latex gloves, Latexx is focusing on nitrile gloves for its new lines, because the margins for nitrile are higher than for natural rubber glove.
  • Nitrile accounted for 20% of glove production in 2009.
  • By 1QFY2010, this percentage will increase to 35%.
Latexx's successful ongoing expansion plan should ensure strong growth for FY2010 and FY 2011. 

Net profit surged:
  • from RM15.2 million in 2008
  • to 52.2 million in 2009
  • as net profit margin expanded from 6.8% to 15.9%.
Judging from the company's
  • rapid expansion plan and 
  • rising margins arising from economies of scale and 
  • higher nitrile production, 
a FY2010 net profit of RM 100 million is within reach.

Successfully boosting capacity by 3 billion pieces of gloves a year in 2010 will set the stage for a surge in 2011 profits, which will benefit from
  • Plant 1's full-year contributions, and 
  • additional contribution from Plant 7.
Latexx is conserving its cash flow for growth, so dividend yield may not be so attractive.

Net debt at end of 2009 - RM 57.4 million
Net gearing:  47% in 2008 declined to 33.7% in 2009.

Estimated cash flow in 2010 - RM 110 million
Capital expenditure in 2010 - RM 75 million.

The share prices of rubber glove companies have corrected on fears of an impending oversupply in 2011.  Although the new supply will reduce the current shortage, it need not necessarily lead to a price war, which is detrimental to all players.

Margins may be squeezed but industry growth will continue at 8% to 10% per annum, probably faster for Malaysian rubber glove companies due to outsourcing by multnationals and the exit of small players.

In a world where growth is uncertain, rubber glove companies are attractive because:
  • they enjoy steadily rising demand which is recession proof,
  • pricing power to pass on rising raw material costs, and
  • low PERs of less than 10 x compared with almost 20 x for the large plantation and construction companies with cyclical earnings.

Latexx:  Overachieving its growth promise
by Choong Khuat Hock
The Edge Malaysia 22.2.2010

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