adventa 20040614 ipo hdbs vickers

7/27/2019 Adventa 20040614 IPO HDBS Vickers

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1 oMalaysia Research Team 603-2711 2222 [email protected]

15 June 2004

Company Focus

Malaysia Equity Research PP 11272/8/2004

MALAYSIA

Refer to important disclosures at the end of this report

Adventa BerhadA glove manufacturer striving to compete globallySecond Board bound Adventa manufactures and distributes sterile surgical gloves andmedical examination gloves. The Groups future strategies include expanding its coreactivities and diversifying its product range into surgical tapes and electrocardiogramelectrodes. Attaching a P/E multiple of 13x on the Groups calendarised Dec 04 EPS of2.5 sen, we have pegged a fair value of RM0.33 for Adventa shares.

A manufacturer of disposable medical gloves. The Group began its business ofmanufacturing and distributing medical examination gloves in 1988. Since then, it hasexpanded to the manufacturing and distribution of surgical gloves. Combined, its presenttotal annual production capacity stands at 940m pieces. About 98% of the Groups productsare exported to the US, the EU, the Middle East, Africa and Asia. Its products have beencertified and endorsed by international standards such as the US Food and Drug

Administrat ion (USFDA), the EUs ISO standards for medical devices and CE Mark.

Diversifying to survive in a competitive environment. Going forward, Adventa will facetough competition from multinationals and large local corporations such as Ansell, WRP,Top Glove and Supermax. As part of its strategy, management plans to focus more on thesurgical gloves business segment, which offers better margins. In addition, the Group wantsto diversify into the manufacturing of surgical tapes and electrocardiogram electrodes, aswell as venture into biomass power generation to reduce costs.

Our fair value is at RM0.33 /share. We have set a target P/E multiple of 13x for Adventashares, based on a 10% discount to our implied target P/E of 14.3x for Kossan Rubber.Based on the Groups calendarised Dec 04 prospectus EPS forecast of 2.5 sen, we havearrived at a fair value of RM0.33/share. At this price, Adventec is valued at a marketcapitalisation of RM148.5m.

Earnings & Valuations Historical Financial Summary

FY (RMm) Jan-02A Jan-03A Jan-04A Jan-05F

Turnover 51.5 63.5 92.1 123.7

EBITDA 5.5 7.2 10.8 n.a.

Pre-Tax Profit 2.8 4.5 5.3 14.3

Net Profit 2.2 3.8 5.1 11.8

EPS (sen) * 0.5 0.8 1.1 2.6

EPS Growth (%) (41.3) 60.0 37.5 136.4

P / E Ratio (x) 66.0 41.2 30.0 12.7DPS (sen) n.m. n.m. n.m. 0.6Div Yield (%) n.m. n.m. n.m. 1.8

ROE (%) n.m. n.m. n.m. n.a.

Book Value (RM) n.m. n.m. 0.20 n.a.

P / Book Value (x)^ n.m. n.m. 1.7 n.a..

* - Based on enlarged share capital of 450m^ - Based on our fair value of RM0.33

F - Based on prospectus forecastnc u es an except ona oss o .1m ar s ng roma wr te-o o a vances to a ormer s are o er@ includes pre-acquisition profit of RM0.98m

FY (RMm) Jan-02A Jan-03A Jan-04A

urnover . . .. . .

retax ro t . . .et ro t . . .

arg n na ys s. . .

retax ro t . . .et ro t . . .

nc u es an except ona o ss o . m ar s ng from a write-off of a vances to a formershareholder

Listed Peers Sector Historical Valuation

Stock Name Mkt Cap (RMm) Current PE (x)Kossan Rubber 249.1 10.7Supermax 314.5 12.0Top Glove 645.8 15.1Seal Polymer 190.4 9.1

n.a.

Issue Price: RM0Fair Value: RM0.3Closing on: 15 JunListing on: 25 Jun

At a Glance

Sector: Industrial Products

Issue Statistics:

LISTING DETAILS

Issue Manager:Af

MerFunds Raised (RMm): 57Shares on offer (m): 202New Shares (m): 190Vendor Shares (m): 12Placement Shs (m): 172Public Offer (m): 30

POST LISTING

Ord Share Cap (m): 450Mkt Cap (RMm)*: 148Est Free Float %: 45* Based on our RM0.33 fair val

USE OF PROCEEDS (RMmWorking capital 29Capex 14Repayment of loans 10Est. listing expense 2R&D 0

Management:Low Chin Guan - MKwek Siew Leng

Ownership:Low Chin Guan 45.0Wong Koon Mei 10.0

Business Description:Key Activities & Products:Sterile surgical gloves, mediexamination gloves, othermedical and hospital relatedproducts.

Customers: Hospitals,Healthcare procurementcentres.

Suppliers: Suppliers of late

fuel and packaging materials

Geographic Spread:Export (US, EU, Middle East

Africa and Asia) 98%;Domestic 2%.


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Adventa BerhCompany Focus

Background

Historical background. The Adventa Group began operations as a manufacturer of examination gloves inKuala Lumpur in 1988. In 1990, it received the US Food & Drug Administration (USFDA) approval for theexport of its medical examination gloves to the US. The Group subsequently moved its operations to KotaBharu, Kelantan to capitalise on the readily available labour there. Through the years, Adventa expanded itsannual production capacity (from < 10m pieces initially to 940m pieces now), widened its geographical reach(by venturing into the European markets) and diversifying into the manufacturing and distribution of surgicalgloves. The Groups manufacturing plants are currently located in Kota Bharu and Kluang. Its product range isas follows:

Type of gloves Usage

Sur ical GlovesSurgical Glove Powderfree Operating Room, General SurgerySurgical Glove Prepowdered Operating Room, General SurgerySynthetic Surgical Gloves Powderfree Latex free, General SurgeryOrthopaedic Surgical Gloves Orthopaedic, TraumaX-Ray Protection Surgical Gloves Cardiology-Orthopaedic Surgery

Examination Gloves

Latex Examination Gloves Patient Contact, Cleaning, LaboratoriesLatex Examination Gloves, Powderfree Patient Contact, Cleaning, LaboratoriesLatex Examination Gloves, Sterile/Powderfree Patient Contact, Cleaning, LaboratoriesLatex Gloves, Powderfree Emergency Medical Service / Trauma / ChemotherapyNitrile Examination Gloves, Powderfree Patient Contact, Cleaning, Laboratories

Dental GlovesLatex Examination Gloves Dental ProceduresLatex Examination Gloves, Powderfree Dental ProceduresSource: Company Prospectus

In terms of sales mix, for the FY ended Jan 04, the Groups output ratio of surgical to examination glovesstood at approximately 60:40. Adventa has several brands of products that are patented, and in light of thegrowing acceptance of the Groups own brands, it plans to increase the ratio of own brand manufacturing tooriginal equipment manufacturer (OEM) products from 55:45 currently to 80:20 within the next three years.

The Groups products have obtained approval and endorsement of the following internationalstandards/regulations:

USA US Food and Drugs AdministrationEuropean Union ISO13488 / EN485 for medical devices

CE MarkAustralia Therapeutic Goods AdministrationTurkey Turkish Standard InstituteCzech Republic Electrotechnical Testing InstituteSource: Company Prospectus

Export-driven business. 98% of the Groups output was exported in last financial year, primarily to the US,Europe, the Middle East, Africa and Asia. The sales breakdowns by geographical areas, for both surgical glovesand examination gloves, are presented in the pie charts below:

Surgical gloves sales distribution, FYE Jan-04 Examination gloves sales distribution, FYE Jan-04

Source: Company Prospectus

Americas

24%

Asia

15%Middle

East

24%

Europe

34%

Af rica

3%

Americas

52%

Asia

5%

Middle

East

21%

Europe

17%

Af rica

5%


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Surgical gloves contributes the most profit. In terms of percentage breakdowns of revenue and gross profit byproduct type, surgical gloves contributed 52% of overall revenue, and accounted for 60% of total gross profit for FYended Jan 04 (see pie charts below).

Revenue by products, FYE Jan-04 Gross profit by products, FYE Jan-04

Source: Company Prospectus

The bigger percentage profit contribution from surgical gloves is mainly due to its higher gross margins. For example,for the last financial year, gross profit margin for surgical gloves came in at 26%, versus examination gloves marginof 16%. The gross profit margin trend for both surgical gloves and examination gloves in the past five years is shownin the table below:

Gross profit marginsFinancial Year Ended

31-Jan-00 31-Jan-01 31-Jan-02 31-Jan-03 31-Jan-04

% % % % %

Surgical gloves 35 25 23 25 26Examination gloves 27 23 16 16 16Distribution - - - 27 26

Average gross margin 28 24 19 21 22Source: Company Prospectus

Prospects

Rising global demand for disposable gloves. Global demand for gloves is growing on the back of heightenedawareness of personal hygiene following the SARS disease and avian flu health scares. Among the biggest glovemarkets in the world are in the US and Europe. In 2002, sales of disposable gloves in the US was estimated at20.15bn units valued at US$1.1bn, whilst in Europe, the market was valued at US$304m with a total volumesales of 4.8bn units. Going forward, glove sales in the US and European markets is projected to grow to 22.2bnand 5.7bn units, valued at US$1.2bn and US$362.9m respectively, by 2008.

In Malaysia, sales of disposable medical gloves were estimated at 38.35bn pieces valued at US$852m in 2002.Examination gloves made up the bulk of the overall sales, whilst surgical gloves accounted for only 23.5% ofthe market. But moving head, it is anticipated that Malaysias sales will grow to 53.2bn units valued atUS$1.1bn by 2008. This will be led by growing sales of surgical gloves, which is expected to increase during theforecast period due to strengthening demand in this sub-sector.

But competition is rife. The rubber glove industry in Malaysia has gone through some tumultuous times withfierce competition from neighbouring countries, price undercutting and rising production costs. However,following some industry consolidations, the number of players has declined to some 70 companies currently,compared to 133 in 2000. Broadly, there are two categories of gloves manufacturing companies: the first beingmultinational companies (such as Ansell and WRP) and large Malaysian companies (such as Top Glove, YTYand Supermax), whilst the second tier comprises small to medium companies and local importers.

Adventa is a relatively small player in the local scene. In terms of plant size, Adventas current combinedproduction capacity, at 940m units p.a., stands well below the annual capacity of Top Glove (7.2bn),Supermax (3.1bn), Kossan Rubber (3.0bn) and Seal Polymer (2.2bn). However, Adventa has successfullycreated a niche in the surgical gloves market segment, with an estimated market share of 15% in 2002, behindAnsell (25%) and WRP (20%).

Distribution

14%

Surgical

gloves

60%Examination

gloves

26%

Surgical

gloves

52%

Others

12%

Examination

gloves

36%


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Focussing more on the surgical glove business. Given its niche position, and the lure of higher operatingmargins, the Group will be focussing more on its surgical glove business ahead. As part of its strategy, theGroup has set aside RM6.5m from the IPO proceeds to extend its existing surgical glove factory in Kota Bharu,by adding two more glove production lines to the current four production lines. This expansion, which will

increase its production capacity by 35% p.a., is scheduled for completion by 3Q04. Upon the commencementof operations, the extra capacity is expected to add a potential RM23.0m in revenue p.a. going forward.

Separately, the Group plans to increase the production capacity of its Johor examination glove plant by 50%for the financial year ending Jan 05, from its current capacity of 150m pieces p.a.

Another strategy is to diversify into new ventures. Under the Groups diversification plans, Adventa willinvest RM5.2m to construct a biomass plant to supply energy and electricity. The plant, which is already 80%completed, is due for commissioning by mid-04. Expected to produce 10.0MW of energy and 1.5MW ofelectricity upon its first full year of operations, the biomass plant will be able to reduce fuel and energy costsfor the Group, translating to a cost saving of RM1.0m every year. At later stages, management expects theplant to rake in incremental revenue of approximately RM2.0m p.a. for the Group.

Also in the works are plans to diversify into a range of disposable surgical operating room products, themanufacturing of surgical tapes and electrocardiogram electrodes. The Group has allocated RM3.0m of theIPO proceeds to purchase equipment and surgical coating equipment for this purpose.

Cost factor. Whilst the Groups turnover is anticipated to grow in tandem with the rising gloves demand,operating profit performance is dependent on price fluctuations for commodities especially latex and fuel, twokey raw materials used to make gloves. In the listing prospectus, Adventa is confident that the rise in averageselling prices of gloves will more than offset any increase in overall production cost, with a projection that pre-tax profit margin (before exceptional items) will widen from 8.0% in FY Jan 04 to 11.5% in FY Jan 05.

Proforma NTA of RM0.20.Meanwhile, the Groups financial position is expected to strengthen slightly afterthe flotation exercise. In particular, following the RM10.0m debt repayment using part of the IPO proceeds,total long term borrowings for the Group will be reduced from RM17.8m previously to RM7.8m post-listing.This is expected to translate to interest savings of approximately RM0.8m p.a. Meanwhile, based on theproforma balance sheet, the Groups NTA per share stands at RM0.20.

Our fair value is set at RM0.33. To arrive at our target price for Adventa shares, we have used a benchmarkP/E ratio of 13x, representing a 10% discount to our CY04 implied target P/E for Kossan Rubber (the onlylisted latex-based glove manufacturer on Bursa Malaysia currently under our coverage) of 14.3x. [Englotech,another listed glove manufacturer followed by us, was not considered as its products are make for industrialusage). We reckon the valuation discount is warranted given Adventas lower production capacity and smallershare capital. Based on the prospectus calendarised Dec-04 EPS projection of 2.5 sen, we have arrived at a fairvalue of RM0.33 for Adventas shares. (Please see table overleaf for a comparison of financial and operatingdata between Adventa and the other listed latex-based glove manufacturers).

However, on the back of the prevailing weak market sentiment, we suspect Adventa shares might come underselling pressure upon listing, as can be seen from the current performance of Seal Polymers share price.Essentially, the share price of Seal Polymer, a manufacturer of rubber examination gloves which was listed on 8Apr 04, have trended down from an opening high of RM2.15 to a recent low of RM1.25. At yesterdays closingprice of RM1.35, the stock is trading at a P/E ratio of 9.1x CY04 calendarised EPS, below our target P/E of 13xfor Adventa shares.


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Stock Comparison

FY Share price HDBSV Calendarised Current Implied target NTA / P/B Target Market cap Production

14-Jun-04 Target 2004 EPS P/E P/E based on share P/B 14-Jun-04 capacityPrice CY04 EPS (p.a.)

(RM) (RM) (sen) (x) (x) (RM) (x) (x) (RM m) (m units)

Adventa Jan n.a. 0.33 2.5 n.a. 13.2 0.20 n.a. 1.7 148.5 0.94

Kossan Rubber* Dec 3.74 5.00 34.9 10.7 14.3 1.88 2.0 2.7 249.1 3.00

Top Glove^ Aug 6.95 n.a. 45.9 15.1 n.a. 1.55 4.5 n.a. 645.8 7.20

Supermax^ Dec 3.90 n.a. 32.6 12.0 n.a. 1.24 3.2 n.a. 314.5 3.10

Seal Polymer^^ Feb 1.35 n.a. 14.9 9.1 n.a. 0.67 2.0 n.a. 190.4 2.20

Average 11.7

Source: Hwang-DBS Vickers Research, Company Prospectus, Reuters Estimates, Bloomberg* Based on Hwang-DBS Vickers forecast^ Based on consensus estimates^^ Based on prospectus forecast

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