Sunday, June 13, 2010

The Good: Latexx Partners Bhd

If you have been following the Malaysian stock market a few months back - or as far as a year back, you would have notice that the rubber gloves companies stock prices and a condom maker (somehow) had gone through some phenomenal surges. It was a little too hot for me that time, so I give it a go and look for some other kind stocks. Recently the heat has subsided and I take a look at some of them.

Latexx Partners Bhd, is among those fast growing companies. Capitalized at RM724mil, its wasn't the biggest rubber gloves company in Malaysia behind the likes of Top Glove (RM3.85bil) and Kossan (RM1.18bil). It was founded by the Low brothers where Low Bok Tek (Robotech), the richest man in Taiping. If you doesn't know who he is, he is one the man who owns Konsortium express bus services  and several other private limited companies. Latexx Partners is currently on an aggressive expansion plan at the back of expected rising rubber gloves demand. Currently it is producing 6 billions of gloves annually where all its manufacturing facilities is located in Kamunting.



Products
Latexx Partners is the OEM manufacturers of rubber gloves to many MNCs worldwide - sort of like Foxconn. Probably because of its focus on higher-end premium segment I would say its product range is narrow compared to its competitors such as Top Gloves where it only produces 3 different types of gloves; powdered latex examination gloves, powder-free latex examination gloves and powder-free nitrile examination gloves. As far as I know there are basically no difference in usage for both powdered and powder-free gloves. Just individual preferences as some are more comfortable with powdered ones while some felt irritated by that. Nitrile ones are made of synthetic rubber. Basically for those who are allergies to natural rubber's proteins.

In 2009, its powder-free latex gloves makes the highest revenue contribute of 56%, while powdered-latex gloves and nitrile gloves contribute 24% and 20% respectively. Latexx has a wide customer base over 300 clientèle in 80 different countries worldwide. 50% of its customers base are from the US followed by Asia Pacific (23%) and Europe (11%).

Historical Performance
Latexx Partners ride over the years has not been smooth and it only looks better in recent years from rising rubber gloves demands. After making losses for six consecutive years (1999-2004), its earnings returns to black in 2005. Its gross margin in 2003 and 2004 looks quite frightening. It looks as if the company has just started and its revenues and gross profits are not enough to cover staff and other expenses. I yet to have information on this but it does look competitions have squeeze its margin quite badly. Low Bok Tek actually left the company as MD in 2001 but return as a CEO in 2004. I'm not sure how true is this, but according to my source, his returns turns the company's fortunes and its does look that way. He manages to reduces losses in 2004 and the company starts making profits in 2005. Gross margins improved to about 14% and a dip in 2007 is probably due to rising commodities prices. The highly improved margin in 2009 is nothing to shout about really because rubber prices is at the lowest around that period.

Revenue Table


Operating Profits Table


Rubber Prices Chart





The management cost control did show some good sign as they actually reduced their administrative expenses which I think cutting numbers of employees by almost half in 2007 as the raw materials prices rose.

On the balance sheet, Latexx does not particularly looks that healthy. Its liquidity over the past 5 years have been below the ratio of 1 except for 2007. Putting a "super stress test" will see the ratio deteriorate even worse to the range of 0.00 to 0.34. Ever since Low Bok Tek reign as CEO, Latexx has seem to improve its balance sheet but it does look a little uncomfortable.

Company Liquidity


For a manufacturing based company, inventories turnover is important. Latexx has been doing well in this area where it able to sells its inventories in about slightly over 2 months. Receivables turnover wise is also pretty good where it able to collect its receivables in about 2 months as well assuming all sales are done in credit terms.

Inventories Turnover

Receivable Turnover

Did I say aggressive expansion plan? On the back of overwhelming rubber gloves demand the group has been expanding their production capacities progressively by adding 26 new production lines from 2007 to 2009. This would explain the sudden jump in revenue in 2008 and 2009. They did not stop there as in 2010, the group spend another RM70mil to build another plant adjacent to the current one which expect to produce another 3 billions pieces of gloves. It is expected to be completed by 2011 which will gives its total gloves production to 9 billions per annum. Current plants are already running at full capacity.

Well we know Latexx does not much cash with them and with such expansion plan, we'll expect its borrowings to increase - and indeed it has. But the increased in capacity has also increase its ability to generate more cash flows. From the looks of it, it does not seem to have too much problem covering the debts which might probably justify Latexx ambitious effort to build another RM70mil plant.

Finance Cost Coverage

Corporate Development and Prospect
Latexx Partners growth will largely depends on two factors. Rising global rubber gloves demand and its high prospect JV with Budev. Recent global epidemic diseases has increase the awareness in many healthcare sectors of higher hygiene standards and practices. I don't have a crystal ball to say when the next global epidemic is going to hit but virus is highly mutate-able in nature and is doesn't look like its going to stop. Although, I am a little skeptical of rubber gloves demand driven by this. Another reason of rising demand will be the increasing healthcare expenditure in many developing countries driven also by aging population. This reason looks more solid to me. There is also an increasing trend of outsourcing to manufacturers which enable MNCs to focus more on their core business, brand building and market development. Question is, is that incredible demand a real one? I think it is, its short inventory turnover and production running at full capacity even after aggressive expansion shows sign of a real increase in demand.



On the corporate side, there are couple of plant expansion plan in place over the next 5 years. Plant 7 is expected to complete by 2013 (productions capacity to increase to 12 billions) while Plant 8 is expected to complete by 2015 which will increase its total productions to 15 billions pairs of gloves annually. All of them are based in Kamunting, cheaper land and avoiding the fight for natural gas power supply.

90% of the current products are supplied to medical sectors and the group planning to venture into food industry by launching a 3.0g nitrile gloves (lower end gloves) which are cheaper than natural rubber gloves. They also plan to launch a 3.5g nitrile gloves that give greater value to medical sectors need.

The biggest growth prospect of all for me will be the JV with Budev through a JV vehicle named Total Glove Company Sdn Bhd. Its patented method MPXX technology in natural rubber gloves examination and surgical gloves is a major breakthrough in its current industry. To explain MPXX technology in short, it is a unique cleaning method that could clean up all allergenic proteins that have been clinically proven to be the cause of latex allergy. This would change the entire face of current industry. But having say so, it will still takes time to win customer trust to this technology probably few years before we can see its shine. Budev explained that they pick Latexx over the likes of Top Glove due to its good name in the market as well as extensive MNCs customer base in which I think they could leverage on the MNCs brand name to help this new technology to penetrate the market. This kind of glove is aim at premium market and is expected to provide higher margin.



My View and Valuation
For me, the solid foundation of Latexx Partners growth is going to be the short-to-medium term rise in rubber gloves demand. The quick full capacity utilization does suggest a shortage of supplies. To value a company like Latexx will be quite difficult as there are too many uncertainties. Well, like Tan Teng Boo said, every company has its price, I'll try to give my best valuation I could for it. Given the good track record of Low Bok Tek management team, I'll make a guesstimate that the demand will meet its expansion plan.

Cost of revenue: I expect the cost of revenue ratio to go back to 86% as the raw material prices recover.
SGA expenses ratio: Management has shown good cost control, expected it to stay at the average of 9%.
Depretiation should rise to RM15mil in 2011 onwards, and RM20mil in 2013 onwards and RM25mil 2015 onwards.
Operations Capex is expected to increase by RM5mil after every expansion just like depretiation and Strategic Capex is expected to be RM70mil.
On the revenue front, revenue growth will be based on this production capacity projections as shown below with about 10% discount and expected to hit full capacity by 2016.

Projected Production Capacity



Since there is a high level of uncertainties in this projections, I'll take a 13%-14% discount as I group it in a group of high risk high return investment. This will give a safe purchase price of RM3.60-RM4.05.

My View: I don't think there is any product distinction between Latexx Partners and other manufacturers. For me, Latexx Partners is just taking a pieces of the pie off other big names. There are chances that Latexx could struggle once the rubber gloves supplies meets the demand. To invest in Latexx Partners is to invest in a company with large Capex laid ahead which will eat shareholders value although it'll eventually have the ability to generate estimated free cash flow of about RM160mil annually. However, there is a bright side in Latexx with their partnership with Budev where they jointly own the MPXX patent. This really could be the NEXT BIG THING. There is a trend of increasing nitrile latex gloves demand and it could be a good sign for MPXX tech type of gloves. It has yet to hit the market, we'll just have to wait and see.

Talking about Latexx Partners is almost like having Steve Jobs managing GM with a new breakthrough vehicle. The management under Low Bok Tek has definitely turned Latexx Partners fortune around. This is a proven management team but this is also a business in a very competitive environment. I can't help but feel that Latexx is riding on the shortage of rubber gloves supplies so no heavy competition just yet. But once the supplies meet the global demand, I am afraid it's going to be quite ugly. That's is why MPXX technology is so vital to Latexx Partners as they can leverage on both rising demand and this technology to dominate the market.

It is difficult to decide where to categorize Latexx Partners. They are promising for short-to-medium term investment but could be tough in the longer term. So I will have it in The Good list as for now and probably describe it as an invest-able company but with high-risk. Will I invest in Latexx Partners? If I invest in Latexx Partners, I'll be betting on MPXX to succeed and it is a good bet. Well, maybe a little. This is a GAMBLE.

(Special thanks to a source for providing some those information)

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at luzeeker@gmail.com

5 comments:

JC Hiew said...

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Anonymous said...

How Latexx compare with Hartalega?

LuZeeker said...

erm...in terms of?

Guantes DE Nitrilo said...

Interesting to observe the increase in the use of latex since 5
years. I believe awareness has increased in people to use gloves to avoid infectious diseases.

Jeringas de insulina said...

Thanks for sharing. I hope it will be helpful to many people that are searching for this topic. Keep posting guys and keep this forum a great place to learn things.