Dipped Products PLC (DIPD) is the fully integrated and globally acknowledged rubber glove manufacturing arm of the local conglomerate Hayleys PLC (HAYL: LKR280.00). Currently DIPD exports its products to +60 countries and enjoys a 5% global market share for natural and synthetic latex based domestic, industrial and medical gloves.
DIPD is globally ranked amongst the top three manufacturers of non-medical gloves whilst it operates 7 production facilities in Sri Lanka and Thailand with marketing operations in Italy.
The company has posted a sharp 33% YoY growth in its bottom line to LKR480.9 mn in FY2010 despite the tough conditions prevailed in the global markets.
Revenue marginally dipped to LKR11,823.7 mn mainly on the back of low latex prices resulted by the global economic downturn despite all their plants were utilized near full capacity through out the year. The company's rubber glove operations contributed +75% of the top line which was 10% YoY down from the previous year whilst its subsidiary Kelani Valley Plantations PLC (KVAL: LKR70.75) contributed the rest.
Further, the company has managed to maintain its gross margin intact at 20%, backed by the sharp 22% YoY fall in DIPD's cost of sales resulted by the low rubber prices during the early part of the year. However, KVAL has recorded a 3% YoY increase in its cost of production due to revised wages of estate labour which went up by 40% with effect from April 2009.
Operating profit margin dipped marginally to 7.2% from 8% in FY2009. During FY2010 DIPD's operating expenses has increased by a mere 5% to LKR 1,538.3 mn, deteriorating the operating margin by a near 1% YoY. The company's other expenses has recorded a two fold increase to LKR13.2 mn from LKR4.7 mn last year owing to the increased costs incurred by its distribution office in Thailand. On the other hand, the other income of DIPD has also recorded an 88% YoY rise where a near 20% of it accounts for Government's export rebates.
Profit before tax recorded a sharp rise of 20% YoY in FY2010 mainly on the back of strong savings recorded in finance costs which was a result of restructuring company's debt coupled with the low interest rates on borrowings. Consequently the company's finance expenditure has recorded a sharp 65% dip compared with FY2009.
Furthermore, pre-tax profit growth of 24% YoY recorded by DIPD's hand protection operations was eroded by the loss of LKR27.9 mn incurred by Kelani Valley plantations owing to the increased wage related pressures. (During the year in concern KVAL recognised a LKR136 mn hit in its income statement as gratuity provision.) However, the company posted a pre tax profit of LKR737.6 mn in FY2010 which is a sharp 20% increase from LKR616. 4 mn recorded in FY2009.
DIPD records a strong 33% YoY rise in post tax earnings. Backed by the cost savings resulted by the low commodity prices in the early part of the year coupled with low borrowing costs, DIPD recorded a bottom line of LKR480.9 mn in FY2010 which is an increase of 33% from FY2009.
Forecast FY2011E earnings to record LKR501.1mn. With the company’s expansion strategies to be implemented in Thailand operations (which would add another 50% to its current capacity during FY2011), continuous focus on new product development coupled with the much anticipated recovery of the global activity from the current downturn, we forecast the company to post a conservative net profit of LKR501.1 mn in FY2011E (up 4.2% YoY) and reach LKR554.9 mn in FY2012E (up 10.7% YoY).
Share is fairly valued trading on 13.7X FY2011E earnings. The share currently trades on 13.7X forecast FY2011E net profits whilst trading at 12.4X projected FY2012E net earnings. DIPD also trades at a +20% discount to the sector and market earnings multiples where as the counter has gained 91.7% YoY. Backed by the enhanced capacities with focus towards further expansion, development of value added products coupled with better returns from the subsidiary on the back of high tea and rubber prices would strengthen DIPD's bottom line in future. Therefore we maintain DIPD a BUY
Courtesy - Asia Research
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