Glove maker Careplus Group Bhd says the worst is possibly over for the company, thanks to the effects of cheaper raw materials and a stronger US dollar.
Executive director and group CEO Lim Kwee Shyan says the company is expecting to generate “better” profit margins this year compared with last year mostly due to the strong US dollar in which most of its sales are denominated in.
“As for raw materials especially those which are purchased in ringgit, the costs of these have also fallen but it is the exchange rate of a strong US dollar against a weak ringgit which makes the effect of the fall in costs even larger,” says Lim, who is the single largest shareholder of the firm with a 26% stake.
Lim estimates a 25% drop in the average price of raw materials such as chemicals as a result of this currency effect.
Year-to-date, the ringgit has weakened by about the same amount against the US dollar.
Careplus is not anticipating the currencies to swing wildly any further or for the ringgit to strengthen immediately.
Having said that, the currency effect will not be fully translated into margins as two of Careplus’ most-used raw materials - latex and nitrile - are purchased in US dollars while the rest are bought in ringgit.
Furthermore, the company has to also adjust its average selling price of its gloves downwards in view of the fall in raw material costs.
At the same time, cost increases in things like labour, energy and other utilities are also in existence.
“Additionally, we also have start-up costs as we recently completed our expansion of production lines, so really, any currency gain is helpful for our margins,” Lim says.
Lim is unable to gauge exactly by how much margins will improve but says it should be enough to drag the company out of its operating losses and onto a steadier path.
Careplus, one of the smallest listed glove firms on Bursa Malaysia, slipped into the red in the third quarter ended Sept 30, 2014 after higher production costs coupled with lower average selling prices put a dent in its earnings and caused it to record an operating loss from an operating profit earlier.
According to a report entitled Global Rubber Gloves Market Report: 2015 Edition published by global research firm Koncept Analytics, the Malaysia glove industry, which controls more than 60% of the world’s glove supply, was slightly affected in 2014 against the backdrop of sluggish economies.
By virtue of its size, Careplus suffered more than its larger peers as it found it more difficult than the rest to enjoy economies of scale amid strong competition.
Contrary to market talk that Careplus has been a takeover target of some of the bigger glove boys for some time now, Lim says it has not been approached so far for this reason.
“Anything is possible but best not to comment on this,” he adds.
After setting up 5 more production lines all of which have recently been commissioned, the Seremban-based Careplus now has some 20 production lines which are capable of producing up to 2.4 billion gloves per year.
In comparison, Top Glove Corp Bhd, the country’s as well as the world’s largest glove company can produce up to 44.6 billion pieces of gloves per annum.
“Our volume is very small by current market standards and we are working hard with our existing buyers to fill up our new capacity,” Lim says.
He says the company will focus on product differentiation as well as “non-standard” items to ensure growth. Its customers are mostly in South America for now but Careplus has plans to expand to other markets like China and North America, according to Lim.
The Malaysian Rubber Glove Manufacturers Association (Margma) has predicted that global demand for rubber gloves will grow at a rate of between 8% and 10% this year, supported by increasing healthcare awareness especially in the growing Asian region.
“While the supply of gloves at the moment remains more than demand in general, we believe this will stabilise eventually as companies adjust their production accordingly,” he says. Availability of workers remains one of the key challenges for the company.
“Our labour force is young with not enough experience to run our new plant, hence they require intensive training.”
As at June 30, Careplus, which was listed on the ACE market in 2010 had cash and bank balances of some RM5mil with total borrowings amounting to RM74.7mil.
For the second quarter ended June 30, the company’s net profit stood at RM1.7mil on revenue of RM45.2mil, giving it a margin of 3.8%. It will release its third quarter results in about two weeks’ time.
At last look, Careplus shares were traded at 54 apiece giving it a market capitalisation of RM198mil.
At the current price, it is just a shade away from its year’s high of 55 sen and is trading at a relatively huge premium to its net tangible assets or NTA of 22.03 sen. The stock has gained some 93% so far this year.