Market Background
- Record high new daily Covid-19 cases closing in on 300k cases per day.
- No sign of pandemic slowing down anytime soon.
- Demand far outstripping supply with Malaysia dominating with 65% of the worldwide glove market share.
- Substantial increase in average selling price of Nitrile glove from US$19.50/ 1000 pieces in Jan 2020 to US$60/ 1000 pieces in July 2020. (Reference from UOB Sri Trang Agro analyst report 23rd July 2020).
- Analysts are expecting increases to be around 5-10% per month for at least the rest of the year. (Reference from UOB Sri Trang Agro analyst report 23rd July 2020).
https://www.businesstimes.com.sg/companies-markets/sri-trang-undervalued-after-listing-of-glove-subsidiary-uobCompany BackgroundVIP glove has a annual production capacity of 620 million gloves.
Company only produces the more premium Nitrile gloves.
Orders are filled through Q2 2021 according to company's announcement in June 2020.
The earnings for VIP gloves is likely to be explosive from the second half of 2020. With Nitrile glove price atUS$60/ 1000 pieces (July 2020 market rate), the company is making crazy amountof money. Before Covid-19, Nitrile glove price was at US$19.50/ 1000 pieces. From UOB Sri Trang Agro report dated 24th July 2020.I have made a brief calculation on its profitability based on this.On28/02/2020, company released its half year report. It made a gross profit of $426,013 on revenue of $5,259,479. This means VIP has a gross profit margin of 8.1% pre-Covid 19. Other expenses such as admin/finance etc came out to be $1.55m. Hence, company made a net loss of $1.08m after taking into account currency exchange.We know that before the onset of Covid 19, the average selling price of Nitrileglove was at US$19.50/ 1000 pieces. Assuming VIP was selling at this marketrate, 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 inthis counter. Fair enough.Change in company's fortune due to pandemicHowever, this pandemic changes the whole dynamic. I cannot accurately predict how much thecompany will be making between 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 glove is a US$60 / 1000 pieces in July and is slated to go much higher. It is not difficult to tell that the company will experience earningsboom especially from the second half of the year as the pandemic seems to get worse.
https://hotcopper.com.au/threads/ann-half-yearly-report-and-accounts.5257768/Base Case Scenario for 2H 2020.At average selling price of US$60/ 1000 pieces.VIP is likely to make a gross profit ofUS$60 - US$17.94 = US$42.06 / 1000 pieces.
The full year production is 620m gloves per year, so half year will be 310mgloves.
Total gross profit before tax could be US$13.04m or around A$18.39m for 2H2020.
Assuming a 50% increase in admin/finance/employee expenses,
net profit before tax for 2H 2020 could be A$18.39m - 150% x $1.55m
= A$16.07m.
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 sellingprice.
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$24.86mfor 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 sellingprice.
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.
If you only attribute a potential 15 times forward Price-to-Earnings ratio,then target price could be $0.65, $0.90 and $1.31 respectively for thedifferent scenarios. Peers in KLSE and SGX are trading way above 25 times. So, even this is an understatement.
The numbers are not plucked from the air, they are the current selling price of gloves. Nitrile glove is selling at US$60 / 1000 pieces, Latex glove at US$42 / 1000 pieces.
I have bought glove and PPE (Personal Protective Equipment) shares since the start of the pandemic, of whichmany have been multi-baggers for me. I believe VIP Glove is the "hidden gem" within the glove sector still yet to be discovered by the general market and its time could come very soon.
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