Dipped Products PLC (DIPD) is the fully integrated and globally acknowledged rubber glove manufacturing arm of the local conglomerate Hayleys PLC (HAYL: LKR301.00). Currently DIPD exports its products to +68 countries and enjoys a 5% global market share for natural and synthetic latex based domestic and industrial gloves.
DIPD is globally ranked amongst the top three manufacturers of non-medical gloves whilst it ventured in to production of medical gloves in 2002 with a production facility in Thailand. At present DIPD operates seven production facilities in Sri Lanka and Thailand with marketing operations in Italy.
Despite the global recessionary pressures which hampered the demand for gloves, the company’s Thailand operation which is dedicated to produce medical gloves has posted a profit of LKR101 mn in FY2010 from a loss of LKR159 mn the previous year. At present all seven plants of DIPD are operating at near full capacity (which is at circa 85%). DIPD also manages the plantation arm of Hayleys group with two listed companies namely: Kelani Valley Plantations PLC (KVAL: LKR99) and Talawakelle Tea Estates PLC (TPL: LKR38.00). The company holds 71.67% in KVAL and 25% of TPL which produces around 5% of Sri Lankan tea and 4.5% of country’s rubber with +19,500 ha.
Further, KVAL sells 25% of its produce to its parent DIPD whilst selling the balance at auctions. Going forward, with the increasing rubber prices resulted by recovering global activity levels we believe KVAL will strengthen the bottom line of DIPD.
Therefore, we forecast KVAL to post a net profit of LKR245 mn in 2010E and to grow by a further 15% YoY in 2011E. Further during FY2010, DIPD acquired one third of Hayleys Plantation Services; the holding company of TPL for a consideration of LKR280 mn. Being one of the high quality tea manufacturers in the country, this venture would also result in a positive push for the group’s bottom line (through associate income).
Future outlook
The glove industry is a steadily growing industry in the world where medical glove category being the main growth catalyst backed by the necessities in healthcare and ever evolving medical technology sectors. Going forward it is estimated that global demand for gloves to be at circa 150 bn pieces in 2010 and to grow by a steady 8%-10% thereafter. The company plans to add another 50% to the current capacity of the Thailand Operation which is the sole medical glove facility of the group in FY2011E for an estimated investment cost USD5.6 mn. This will increase the production of the plant to 855 mn medical gloves per annum by the end of FY2011, which is inline with the high growth potential of the medical glove segment. Out of the total investment 30% would be equity funded by DIPD whilst the rest would be financed from bank borrowings. Backed by the additional capacity coupled with reliable and long lasting customer base in 68 countries we believe DIPD would post sustainable earnings growth in the years to come.
Fluctuating rubber prices could affect the company’s margins considerably and current escalating rubber prices in the global commodity exchanges remains a concern to the company as a near 50% of the cost of production comprises of latex sourcing costs. However, DIPD could wither the negative effects to a certain extent as they can pass the price hike to its customers.
Furthermore, weakening Euro amidst the financial crisis in European Union would also have negative impact on company earnings. It should be noted that additional capacity would add value to the earnings only from FY2012 (as all three production lines would commence operations by the end of FY2011) whereas borrowing costs would impact the bottom line of the company in the short term (with 70% of USD5.6 mn being funded from debt).
The management of DIPD is positive about its future and plans to implement lean production systems to all its plants with the objective of improving productivity. To minimize the energy costs the company has already taken measures to reduce dependency on fossil fuels where a few plants have bio mass heaters in place. The management also stated that the loss of GSP+ for Sri Lankan exports would not have a material effect on DIPD’s sales, as only 3% of its total production would fall in to GSP+ benefited category. In addition, the company’s continuous focus on new product development aiming especially the niche markets in the glove industry would enhance the sustainability of the earnings growth.
Forecast FY2011E earnings to record LKR723.7 mn. 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 and healthy earnings from plantation arm (backed by escalating rubber prices and higher tea prices), we forecast the company to post a net profit of LKR723.7 mn in FY2011E (up 50.5% YoY) and reach LKR814.3 mn in FY2012E (up 12.5% YoY). Share offers good value trading on 10.5X FY2011E earnings.
The share currently trades on 10.5X forecast FY2011E net profits whilst trading at 9.4X projected FY2012E net earnings. Hence, 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 the future. Therefore we rate DIPD a BUY
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