Latexx Partners Bhd (Aug 9, RM3.52)
Maintain outperform at RM3.59 with target price of RM5.44: Latexx's 1H2010 results were largely in line with expectations. Annualised 1H net profit made up 84% of our forecast and 85% of consensus numbers, but 2H should be stronger, thanks to its capacity expansion. Also within expectations was its second interim dividend per share (DPS) of 2.5 sen (2Q09: one sen), which took year-to-date DPS to five sen, in line with our full-year forecast of eight sen.
We retain our earnings forecasts and target price of RM5.44 as we continue to value Latexx at a 30% discount to Top Glove's target PER of 16.5 times. The stock remains an outperform, premised on the potential re-rating catalysts of improving earnings ability driven by its expansion and a move towards premium products. Latexx remains one of our top picks for the rubber glove sector.
Latexx saw bottom-line growth despite a slight margin erosion. Its 2Q sales volume increased 8% quarter-on-quarter (q-o-q) to 1.4 billion pieces. Almost 70% of sales went to the US market. Despite a slight earnings before interest and tax (Ebit) margin slippage of 0.5 percentage point q-o-q due to a steep rise in latex prices and a depreciating US dollar, its net profit improved 4%. Nitrile gloves made up 40% of sales during the quarter. About 43% was in the form of powder-free natural rubber (NR) gloves and the remaining 17% came from powdered NR gloves.
More than 90% of Latexx's output is taken up by the medical industry, making demand for its products resilient. Despite the margin contraction evident in the recent results of several rubber glove manufacturers (Adventa, Top Glove and Latexx), we are not unduly worried as this is not the first time glove manufacturers are facing this situation. In the past, glove manufacturers have demonstrated their ability to pass on higher latex and weaker US dollar, albeit with a time lag of about one to two months. Across the board, rubber glove manufacturers still expect rising demand from traditional healthcare usage and new segments like the food and services industry.
Demand for Latexx's gloves remains good this year, going by the 90% utilisation of its production lines, similar to last year's 89.8%. In view of the growing demand, especially from its numerous MNC customers, the company is holding firm to its capacity expansion plans. Its current expansion includes the addition of 20 lines by year-end, which will take its annual production capacity from seven billion pieces to nine billion pieces. The company's long-term plans involving two more factories could take its capacity to as much as 15 billion pieces by 2015. — CIMB Research, Aug 9
by The Edge Financial Daily
This article appeared in The Edge Financial Daily, August 10, 2010.
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