BUOYED by a high glove average selling price (ASP) for the July-September period, Rubberex Corp Bhd is on course to post a strong 3Q FY2020 by end-November.
In fact, RHB Research expects the company’s earnings to double on a quarter-on-quarter (qoq) basis as well as to surge more than 10 times year-on-year (yoy).
“Based on the results and outlook shared by Hartalega Holdings Bhd and Supermax Corp Bhd both of whom reported their earnings in October, we may have underestimated the quantum of ASP increase,” wrote analyst Alan Lim in a results preview.
“This is due to the worse-than-expected rate of COVID-19 infections globally, and shortage of nitrile butadiene (the raw material used to manufacture nitrile gloves).”
RHB Research expects nitrile gloves which accounted for about.45% of Rubberex’s total FY2019 revenue to increase to 80% in its FY2021.
On this note, the research house noted that Rubberex has completed building its new factory and 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, hence its 4Q FY2020 earnings should be much better qoq,” projected Lim.
“For the nitrile gloves segment, Rubberex’s capacity will increase 150% to 2.5 billion pieces per annum (ppa) from 1.0 billion ppa currently.”
RHB Research also applauded Rubberex’s share buyback exercise worth RM26.9 mil which was undertaken over the Oct 2-14 period at prices ranging from RM5.63 to RM7.87 (pre-bonus issue).
“This is equivalent to RM1.88-RM2.62 post bonus issue. We believe this is a strategic move by the management when it deemed its shares to be undervalued,” opined Lim.
“Separately, Rubberex on Oct 21 completed its two-for-one bonus issue with the listing of 555 million shares. Post-bonus issue and share buyback, its latest number of shares total 800 million”.
All-in, RHB Research maintained its “buy” rating on Rubberex with a higher target price (TP) of RM3 following the lifting of the company’s FY2021-2023F core earnings by 48-136% on higher ASP assumptions.
“The higher TP is in line with our assumption of elevated earnings growth,” justified Lim. “In the short term, the 3Q FY2020 earnings should improve qoq due to the ASP increase.”
However, the biggest downside risk for Rubberex and other glove-related stocks is a safe and effective COVID-19 vaccine being made available globally faster than expected. Other risks include lower-than-expected sales volume, foreign exchange fluctuations (RM/US$), and higher-than-estimated raw material prices.
At 10.25am, Rubberex was up 5 sen or 2.19% at RM2.33 with 5.43 million shares traded, thus valuing the company at RM1.94 bil. – Nov 5, 2020
