"Furnaces" is a Singapore-based investor. His article contribution follows from our recent piece "This M'sian glove maker is valued at $60 million while peers have surged"
| ASX-listed VIP Gloves has an annual production capacity of 620 million gloves currently. It is boosting capacity to 1 billion gloves over the next 1.5 years. Based in the Malaysian state of Selangor, it produces only nitrile gloves, which command a premium over latex gloves and vinyl gloves. Orders are filled through Q2 2021, according to company's announcement in June 2020. The earnings for VIP Gloves is likely to explode from the second half of 2020.  Listed in Australia, VIP Gloves operates out of a factory in the Malaysian state of Selangor. Photo: Company |
With nitrile gloves priced at US$60/ 1000 pieces (July 2020 market rate), the company is making a crazy amount of money.
|
Stock price |
12.5 c |
|
Market cap |
A$93 m |
|
PE |
-- |
|
Dividend yield |
-- |
|
Shares outstanding |
745.7 m |
Before Covid-19, the price of nitrile gloves was US$19.50/ 1000 pieces (Source: UOB report on Sri Trang Agro dated 24th July 2020).
I have made a brief calculation on VIP Gloves' potential profitability based on this.
On 28/02/2020, the company released its half year report. It said it made a gross profit of A$426,013 on revenue of A$5,259,479.
This means VIP had a gross profit margin of 8.1% pre-Covid 19. Other expenses such as admin/finance etc came up to A$1.55m.
Hence, the company made a net loss of A$1.08m after taking into account currency exchange.
We know that before the onset of Covid 19, the average selling price of nitrile gloves was US$19.50/ 1000 pieces.
Assuming VIP was selling at this rate, VIP should have had a gross production cost of around US$17.94/1000 pieces.
It wasn't making money after taking into account admin/finance/employee expenses and there was certainly no interest in this counter. Fair enough.
Change in company's fortune due to pandemic
I cannot accurately predict how much the company made Jan-Jun 2020 as I don't have the monthly figures or the rate of increase in average selling price.
We only know the average selling price for nitrile gloves was US$60 / 1000 pieces in July and is slated to go much higher.
It is not difficult to tell that the company will experience an earnings boom especially from the second half of the year as the pandemic seems to get worse.
At average selling price of US$60/ 1000 pieces. VIP is likely to make a gross profit of US$60 - US$17.94 = US$42.06 / 1000 pieces. |
| Average Case Scenario for 2H 2020 |
At average selling price of US$68/1000 pieces. (5% monthly increase in ASP from July to Dec).
10% of the production allocated to spot buys at 2 times the normal selling price.
Spot delivery net profit = (10% of 310m gloves x (200% x US$68 -US$17.94)/ 1000 pieces) = US$3.66m
Normal delivery net profit = (90% of 310m gloves x ((US$68 - US$17.94)/ 1000pieces))) = US$13.97m
Total gross profit before tax could be US$17.63m or around A$24.86m for 2H 2020.
Assuming a 50% increase in admin/finance/employee expenses, net profit before tax for 2H 2020 could be A$24.86 - (150% x $1.55m) = A$22.54m.
| Bull Case Scenario for 2H 2020 |
At average selling price of US$78/1000 pieces. (10% monthly increase in ASP from July to Dec).
25% of the production allocated to spot buys at 2 times the normal selling price.
Spot delivery net profit = (25% of 310m gloves x (200% x US$78 -US$17.94)/ 1000 pieces) = US$10.70m
Normal delivery net profit = (75% of 310m gloves x ((US$78 - US$17.94 )/ 1000pieces))) = US$13.96m
Total gross profit before tax could be US$24.66m or around A$34.77mfor 2H 2020.
Assuming a 50% increase in admin/finance/employee expenses, net profit before tax for 2H 2020 could be A$34.77 - (150% x $1.55m) = A$32.45m.
| What's a potential target price for the stock under those 3 scenarios? For simplicity, asumming corporate tax of 30%, and a 15X price-to-earnings ratio, the target price could be $0.455, $0.63 and $0.92 respectively. By the way, peers in KLSE and SGX are trading way above 25 times PE. I have bought glove and PPE (Personal Protective Equipment) shares, including Medtecs International, since the start of the pandemic, of which many have become multi-baggers. I believe VIP Gloves is the "hidden gem" within the glove sector still yet to be discovered by the general market and its time could come very soon. |
