adventa ta ipo listing

[ 1 ] Adventa Berhad

28 Jun 2004TA Securities Bhd N

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Adventa BerhadHand In Hand With Surgeons

KLCI 824.23

Adventa stands out from other listed rubber gloves manufacturer dueto its surgical glove business, which contributes 60% to Groups' grossprofit. Globally, Adventa is among the top 5 surgical glovemanufacturer whilst locally it is the largest manufacturer. Surgicalglove business has an edge over other rubber gloves due to its highmargins and high barriers of entry. According to Frost & SullivanResearch Report, the estimated US and Europe 6-year CAGR forsurgical gloves demand ending 2008 is at 5.1%. MARGMA record,however shows Malaysia's exports of surgical glove has beencontracting by 7.5% for the past 6-year on a compounded basis. Giventhe lower demand growth for surgical gloves as compared toexamination gloves we are valuing Adventa at 15% discount to ourestimated rubber glove industry average of 15.0x PER. Fair value isRM0.35 based on 12.7x FY05 EPS or a potential upside of 16.7% fromissue price. Going forward, Adventa will intensify its marketing pushfor branded surgical gloves, launch new products & processes, enhancebusiness synergy with diversification and implement cost savingstrategies.

Adventa, A Glove ManufacturerAdventa Group is mainly involved in manufacturing and distribution of sterilesurgical & examination gloves. In addition to its core business, Adventaalso distributes non-glove medical & hospital-related products as well asgenerate energy and electricity via biomass technology. Adventa's productrange includes:Key Product Categories Detail Product RangeSurgical Gloves Latex Surgical, Latex Surgical Powder Free,

Synthet ic, Surgicals, Orthopaedic andMicrosurgery

Examination Gloves Powdered, Powder Free, Ni t r i le andProcedures

Non-Glove, Related Hospital Products Surgical Masks, Gowns, Tapes, Shoes Covers& Head Dress

Analyst Tai Jen NeeE - [email protected] 20721277 ext 1612

TA Securities Bhd (16029-V)Menara TA One, 22 Jalan P Ramlee,

50250 Kuala Lumpur. MalaysiaTel : 603 - 2072 1277. Fax : 603 - 2032 5048

28 Jun 2004

RM0.35 (+16.7%)Fair Value

TA SECURITIES BHDParticipating Organisations of

Malaysia Securities Exchange Berhad

SHARE INFO

Stock Code ADVENTAListing 2nd BoardEnlarged Share Cap (m) 450.0Market Cap @ RM0.35 (RMm) 157.5Par Value (RM) 0.10IPO (m) 67.5Issue Price (RM) 0.3Estimated Free Float (%) 45.0%Listing Date 29 June 2004Major Shareholders (%)

Low Chin Guan - 45.0%Wong Koon Mei @Wong Kwan Mooi - 10.0%

RATIO & ANALYSIS

NTA/shr (Post IPO) (RM) 0.20Price to NTA ( x ) 1.9ROE - '04 15.0%ROA - '04 5.7%Net Gearing - after IPO ( x ) Net Cash of

RM28.7m

UTILISATION OF IPO PROCEEDS

(RMm) (%)Capital Expenditure 14.7 25.8Repayment Of Borrowings 10.0 17.5Research And Development 0.5 0.9Working Capital 29.8 52.3Estimated Listing Expenses 2.0 3.5

57.0

EARNINGS SUMMARY (RMm)

YE 31 Jan 2000 2001 2002 2003 2004 2005ERevenue 39.6 43.9 51.5 63.5 92.1 123.7Pretax profit 6.2 4.4 2.8 4.5 7.4 12.4Net profit 5.6 3.8 2.2 3.8 5.1 10.3EPS * (sen) 2.1 1.5 0.9 1.5 2.0 2.8EPS Growth (%) 0.0% -31.2% -41.3% 70.0% 33.6% 41.7%PER @ RM0.35 (x) 16.5 24.0 40.9 24.1 18.0 12.7Div (sen) 0.0 0.0 0.0 0.0 0.0 0.6Div Yield (%) 0.0 0.0 0.0 0.0 0.0 1.6* - FY00 - FY04 based on weighted average share capital of 260m FY05 based on enlarged share capital of RM371m

Sector : INDUSTRIAL PRODUCTS Bloomberg : ADV MK For Internal Circulation Only


28 Jun 2004TA Securities Bhd

Group Of CompaniesCompanies within the Adventa group are:Name Of Subsidiary Effective Principal Activities

EquityInterest

Terang Nusa S/B (TNSB) 100% Manufacturing and distribution ofsterile surgical gloves and medicalexamination gloves.

American Health Care Malaysia S/B (AHSB) 100% Manufacturing and distribution ofsterile surgical gloves

Profit Point Manufacturing S/B (PPM) 100% Manufacturing and distribution ofmedical examination gloves

Ulma International GmbH (Ulma) 100% Distribution of medical and otherhospi ta l re lated products.Incorporated in Germany, act asstocking warehouse, service pointand marketing division for thegroup's European market.

Nusaco S/B (Nusaco) 100% Generation and supply of energyand electr ic i ty using biomasstechnology

A Leading Surgical Gloves ManufacturerAdventa is among the top 5 application surgical glove manufacturer in theworld and the largest surgical glove manufacturer in Malaysia. Adventa holdsapproximately 8% global market share for surgical gloves after Ansell's 35%share and before WRP (Asia Pacific's) 5% share. Unlike most of its listedrubber glove makers, Adventa's niche lies in its surgical gloves business.Currently more than 50% of Adventa's earning are generated frommanufacturing and sales of surgical gloves. Since FY00, gross profitcontribution from the surgical gloves has been on an up-trend.

Products Contribution To Contribution to GP MarginRevenue Gross Profit (%)

FY00 FY04 FY00 FY04 FY04Surgical Gloves 23% 52% 27% 60% 26%Examination Gloves 77% 36% 73% 26% 16%Other - 12% - 14% 26%** - Distribution

As a relatively new player compared to Ansell (an experienced player forestimated 60 years), Adventa has successfully penetrated into surgeons'preferred product list. Locally Adventa has 60% of surgical glove marketshare as compared to Ansell's 40% share. The latter used to dominate theMalaysia market. Adventa's surgical gloves will continue to receive strongdemand, given acknowledgements from surgeons, recognised bodies andcorporations.



Year Key Achievements/Recognitions1997 First Malaysian owned company to achieve TUV European certification for ISO

9002 and EN 46002 for its surgical glove production2001 Commenced supply to USA Defence Department2001 Inspected by US FDA and certified compliant to FDA requirements2002 Maritex Duplex Orthopaedic Glove accepted by Christus Hospital Group, USA2003 Maritex Duplex accepted and used by hospital of Special Surgeries, New York, a

major reference for orthopaedic products in USA2003 Products accepted by SingHealth, Singapore public hospital group, enabling

supply of surgical gloves to its hospitals2003 Products accepted by Ministry of Health in Malaysia, to supply to government

hospitals2003 Invited to bid and be a supplier for Novation, Healthtrust and Premier, 3 largest

Group Purchasing Organisation in USA2003 New certification ISO 9001:2000 and EN13488:2000 by SGS Yardsley, United

Kingdom2004 Awarded acceptance by Veteran Administration Department of US Government

as their supplierSource : Prospectus

Surgical gloves are used for general and specialised surgeries. The formercomprise of basic surgeries which are less critical while the latter includesneuro-reconstructive surgery, orthopaedic surgery, involving specialised andmicrowork.

Complimentary ProductsThe sales of examination glove and other related product complimentsAdventa's surgical gloves business. The added product range increasescustomer's purchasing convenience. This encourages sales demand withminimal cost incurred as sales network for surgical gloves is tapped onto.

Best Of Both WorldThe Group is both an original brand manufacturer (OBM) and originalequipment manufacturer (OEM) at a ratio of 55%:45% respectively. Being asurgical glove manufacturer, brand reputation is highly important. Good brandreputation among surgeons qualifies your products' value add, quality andcomfort. This in- turn ensures sales growth. Going forward the Group targetsto increase its OBM contribution to 80%. Adventa's in-house brand includesSENSIFLEX Plus, MAXITEX, SUR-G GLOV, NUZONE, Maxitex Duplex,Maxitex Duplex PF, Maxitex Neuro PF and NUGARD. These brand nameshave been registered as Adventa's trademarks except for Depro and SUR-GGLOV which are pending approval. As an OBM, Adventa has better controlover its business and earns additional profit from distribution.



Research And Development Paying OffAdventa had invested heavily on R&D. Over the last 3 years, a total ofRM1.34b or an average of 1% per annum of turnover was spent on R&D.Their efforts have paid off with new application surgical gloves such as :Products Details Year Of LaunchX-ray surgical glove The only x-ray protective range of surgical

gloves, a stand alone glove do not requireadditional protective sheaths for x-ray surgery. 1999

Maritex Nuzone Synthetic surgical glove for surgeons who arelatex sensitised and have adverse reaction tonatural latex based materials. 2000

SENSIFLEX Plus Powder-free glove, all sensitivity needed bysurgeons for use in surgery & extended shelf life. 2001

Maxitex Duplex Innovative orthopedic & trauma glove, uniquedouble gloving concept. 2002

Maxitex Neuro Application glove for neurological and ophthalmicprocedures. High sensitivity and tactillity forease in conducting precision microsurgery 2004

On top of the above, Adventa has several new products pending official launch.These include G2 Synthetic Surgical, G3 WD Powderfree Surgical, Laminated3-Layers Surgical and Synthetic Orthopaedic & Trauma. Management willintroduce these products at the right time, likely upon exhaustion of premiumvalue from existing product range.

History And Outlook Of Surgical GlovesGlobal market demand for disposable surgical gloves in 2002 is estimated atUSD650m, or 1.4b pieces of gloves. The 4-year compounded annual growthrate (CAGR) ending 2002 for sales revenue and quantity combining bothUSA and Europe market amounts to 2.2% and 3.8% respectively.

Going forward, management estimates 6-year CAGR for revenue and quantityending 2008 to register 2.2% and 5.1% respectively. Demand growth will bedriven by rising illness per head, changing legislation & work practices thatpro-rubber gloves usage. The growing affluence in Middle East and PacificRim is expected to lead to improved healthcare services that will in turnresults in higher demand for surgical gloves.

Malaysia's export of disposable medical gloves in FY03 amounts to RM3.4bor 54.9b pieces. Other (examination, industrial & household) and surgicalgloves contribute approximately 96% and 4% to Malaysia's export quantityrespectively. Malaysia's exports of surgical glove contracted for the past 6years compounded ratio of 7.5% and 2.5% in terms of quantity and valuerespectively. In fact, the contribution of surgical gloves exports to total gloveexports for Malaysia has been declining for the past 4 years.

Year Contribution of surgical gloves (quantity)to total Malaysia rubber gloves export

1997 16.7%1998 21.8%1999 22.6%2000 13.1%2001 9.0%2002 9.9%2003 4.0%Source : Malaysian Rubber Glove Manufacturers' Association (MARGMA) newsletter



High Barriers of EntryDemand for Adventa's surgical gloves is protected from near term marketsaturation due to the industry's high barrier of entry. The high barriers ofentry is due to :i. High Quality Required

Given the critical nature of work which surgical gloves' end users areinvolved in, quality standards and usage effectiveness is highly regarded.

ii. Long Gestation PeriodBefore new value added surgical gloves can be introduced to the market,manufacturers need to go through tedious process which involves:a) evaluation of existing product and end users needsb) research &developmentc) prototype testingd) patent search and application of approval from US FDA and other

relevant standards & regulatory bodiese) feedback from various local and overseas medical bodies on product

viabilityf) extended trial evaluations carried out by overseas hospitalsg) launching of product upon favourable commentsh) patent application in both local and overseas countriesIt takes approximately 2-3 years for a conceptual design to hit the market.

iii. PatentsSurgical gloves which are unique in terms of designed, chemicalcomposition and functionality, are patented both in Malaysia and overseas.Adventa's patented product increases barriers against duplication by newentrants.

Besides the long gestation period in recovering initial investment, costincurred during the period also post another barrier. Brand loyalty amongend users or surgeons also makes it hard for new player to penetrate market.

Managing AnsellLocally only approximately 25% of the 80 MARGMA rubber glovemanufacturers are involved in surgical gloves. Adventa Group has a dominantposition as production volume of surgical gloves for the rest of themanufacturers are fairly small. Among the listed rubber glove manufacturersonly Supermax, Top Glove and Kossan produces surgical gloves. Surgicalgloves revenue only account for 5.0% and 0.6% of Supermax and Top Glove'sgroup revenue respectively. We do not expect Adventa to experience anythreat from local players. In the global arena, Adventa faces head-oncompetition from Ansell, an old timer in the surgical glove industry.Nevertheless Adventa has been successful in penetrating into Ansell's existingcustomers base.



Ambitious Plans Ahead

I Further Penetration Into Existing MarketAdventa will continue its effort to convert surgical glove users towardspurchasing the Groups' surgical gloves. At this moment, 4 of Adventa'sbranded surgical gloves records a penetration rate of 10% or less whileMaxitex brand has up to 30% share among existing surgical glove users.Vast market expansion awaits Adventa. Currently products are mainlyexported to USA, Europe, South America, Middle East and Africa. Salescontribution from USA and Europe for surgical gloves amounts to 42%and 32% respectively. Meanwhile examination gloves are sold mainly toEurope (48%) and USA (33%).

II Expand Geographical ReachThe Group also intends to sell its' products to South Korea, China andASEAN countries. Strategies include setting up manufacturing facilitiesin the respective trade bloc areas to take advantage of the trade incentivesavailable in various regions.

III Commercialisation Of R&D ResultsNew product launches which are scheduled for 3Q04, 2005 and 2006 willcreate new demand. Hence boosting earnings growth. New productincludes:

(a) 2nd generation synthetic surgical, 100% more elastic and 50% moreresistant to tearing

(b) wet donnable trilayered powderfree latex surgical(c) synthetic orthopaedic and trauma gloves, higher tear resistance

Adventa has identified new materials such as synthetic polyisoprene,neoprene (urethane), multi-centrifuged irradiated natural latex, titanium(x-ray blocker). These materials will be improvised to develop newapplication gloves.

INDUSTRY COMPARISON AMONG LOCAL LISTED PLAYERS

APLI Kossan Latexx Rubberex Supermax Top Glove Seal Polymer AdventaFYE Dec '04 ## Dec. '04 # Dec. '04 # Dec. '04 # Dec. '04** Dec. '04 ## Feb. 05 ** Jan. '05 **

Share Price @ 23/06 0.55 3.74 0.66 2.17 3.86 7.10 1.35 0.30Revenue 229.0 235.5 35.6 105.7 248.3 437.2 212.1 123.7Net Profit 23.1 20.8 -13.1 9.6 29.4 42.6 23.5 10.3EPS (sen) 6.7 31.3 net loss 21.2 36.8 45.9 16.7 2.8NTA/Share 0.3 1.9 0.2 1.6 1.5 1.6 0.8 0.2PER (x) 8.3 11.9 n/a 10.2 10.5 15.5 8.1 7.9PBV (x) 1.9 2.0 3.9 1.3 2.6 4.6 1.6 1.5Dividend Yield 0.0 0.8% 0.0 7.8% 1.2% 1.7% 0.0% 2.0%ROE ^ (%) 3.8% 13.5% net loss 10.4% 15.4% 17.8% 32.3% 15.0%ROA ^ (%) 2.4% 8.3% net loss 7.2% 9.2% 10.7% 13.3% 5.7%Net Gearing ^ ^ (%) 39.1% 26.5% 281.9% 11.3% 19.6% 22.0% 28.1% Net CashProfit before tax ^ (%) 9.2% 10.4% net loss 9.9% 12.8% 10.9% 8.3% 10.4%CAGR - Revenue (FY00-FY03) 2.7% 19.8% -17.8% 3.3% 31.0% 37.0% 31.7% 28.0% - Net Profit (FY00-FY03) -74.2% 88.7% net loss -13.3% 32.5% 29.5% 34.7% 33.3%EPS Growth FY04 333.9% n/a n/a n/a 70.5% 48.3% 7.2% 41.7%

* actual results** estimated results# calenderised actual results## calenderised estimated results^ derived from latest financial year^^ derived from latest quarter except for Seal Polymer based on proforma resultsn/a not available



The Group constantly invents new and enhances existing processesto produce higher yields and quality products. Some potential installationincludes multi dipping technology, triple synthetic (natural lamination),sustained viscosity latex, microwave vulcanisation and electron beamon-line sterilization.

IV Synergistic diversificationAdventa is looking to increase its medical or hospital product offerings.The Group is currently in discussion with an Argentinian company tomanufacture surgical tapes and wound management products. The jointventure involves technology transfer from foreign partner to Adventa, whilstthe former benefits from Adventa's cheaper manufacturing base andestablished client network. The new product will ride on Adventa's existingclient base & distribution network and also increase market acceptanceof its' brands.

Cost Reduction Strategies

I. Biomass Energy GenerationLike most listed rubber glove manufacturer, Adventa is venturing intoBiomass energy and electricity generation. The Group is in the midst ofconstructing a Biomass plant adjacent to its factory in Kota Bahru. Theplant is approximately 80% completed and will be commisioning soon.The plant will save Adventa up to 50% of its existing energy expenditureof RM1m per annum. In addition, the plant is expected to generate anestimated RM2.0m additional revenue per annum.

II. Recycling Water Treatment FacilityAdventa has started recycling its used water and targets to recycle up to80% of its water supply by 2005. This is expected to save approximatelyRM0.2m per annum and reduce Adventa's dependency on outside sourcefor its water supply.

Fair Value At RM0.35We expect Adventa's earning to grow by 41.7% to 2.78sen in FY05, aconservative estimate if compared to management's estimate of 63.0% EPSgrowth. Management expects whopping 2.3 percentage point expansion inprofit before tax margin from 9.2% (5 years average) to 11.5% in FY05. Thisis driven by rising sales, supported by additional capacity and loweroperational cost. We believe our 0.8 percentage point profit before tax marginexpansion is fair given that R&D expenditure budget remains at RM0.5mlevel, similar to previous years.

The rubber gloves manufacturers under our coverage are currently trading atan average of 11.4x PER. We believe these key players should be trading atleast 15.0x PER due to their commendable historical CAGR growth for revenue& net profit and bright EPS growth outlook. Despite the concerns with regardsto US interest rate hike, rising oil prices and slow down in China's economy,earnings for the rubber gloves companies will continue to be post doubledigit growth. Demand for rubber gloves will be resilient as it is a necessity.We like the industry for its resilience. We are fairly valuing Adventa atRM0.35 based on 12.7x PER. Potential upside of 16.7% from issue price.The valuation is at 15% discount to our average valuation of the industry keyplayers 15.0x PER. This is because of lower demand growth rate for surgicalgloves as compared to examination gloves. Nevertheless valuation is at11% premium over their current average valuation of 11.4x PER.

The information in this report has been obtained fromsources believed to be reliable. Its accuracy orcompleteness is not guaranteed and opinions are subjectto change without notice. This report is for informationonly and not to be construed as a solicitation forcontracts. We accept no liability for any direct or indirectloss arising from the use of this document. We, ourassociates, directors, employees may have an interestin the securities and/or companies mentioned herein.

for TA SECURITIES BHD,Yaw Chun Soon, Executive Director - Operations

adventa ta ipo listing

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