While the rubber glove industry is having a euphoric run with demand surging, ancillary companies whose fortunes are tied to the industry are not sharing the same good fortune.

ACE-Market listed ES Ceramics Technology Bhd, one of the two major manufacturers and suppliers of a key component in the manufacture of rubber gloves — ceramic hand formers — has not seen the same success as its customers.

Despite being profitable since its inception in 2003 — except for FY2009 ended May 31 — the company’s market capitalisation is RM11.4 million, based on its closing price of 21.5 sen.
While the share prices of rubber gloves manufacturers have skyrocketed in recent years, ES Ceramics has lost 65% of its value from its IPO price of 55 sen in 2005.

“I don’t blame investors for giving us the cold shoulder. The numbers weren’t great, as we have spent the last few years acquiring our competitors and rationalising the group’s operations,” ES Ceramics executive director and CEO Wong Fook Lin tells The Edge.

“Still, we have been profitable for all years since we started business in 2003, except for FY2009 due to a debt write-off of RM1 million. Now, the rationalisation is bearing fruit and our operations have started to normalise,” he says.

For the interim period ended Nov 30, 2009, ES Ceramics revenue increased 45.4% to RM12.21 million, from RM8.39 million in the same period in 2008. And operating profit before working capital changes, a better measurement of its operating performance, surged 66.7% to RM3.09 million.

Wong, who owns 7.56% of ES Ceramics, says the benefits from efficiency gains, economies of scale and streamlining of activities from the acquisition of smaller competitors, GTR Ceramics Sdn Bhd in November 2006 and Euroceramics Technologies Co Ltd in October 2008, have started to show in the group’s recent results.

Wong said the rationalisation of GTR and Euroceramics’ operations was a painful experience. One of the acquisitions had RM1 million in bad debt that had to be written off for FY2009, and the group had to provide an additional RM800,000 for other longstanding debtors.

In addition, ES Ceramics’ expansion by way of acquisition resulted in the group having a relatively high net gearing of 1.6 times, with consolidated net borrowings of RM23.9 million against its shareholders equity of RM15.2 million as of Nov 30, 2009.

While trying to manage the different cultures and financial problems of the companies, management has also expended much time trying to standardise the blend of clay raw materials and manufacturing processes in the group’s three plants located in Perak and Thailand.

“It’s easy to acquire companies. But the headache came later in terms of managing the companies’ different cultures and rationalising the enlarged group operations. I am sure [Datuk] Stanley Thai couldn’t agree with me more,” says Wong.

Thai’s Supermax Corp Bhd, a rubber gloves manufacturer, acquired its competitor APL Industries Bhd in 2005,  but sold out of the company in 2009 after failing to turn it around.

But the acquisitions of GTR and Euroceramics have made ES Ceramics the biggest manufacturer of hand formers in the country, Wong says, with a running capacity of 250,000 to 300,000 units per month, up from 80,000 when it was listed in 2005.

Its next biggest competitor is the Malaysian unit of Germany’s CeremTec, which has a running capacity of about 150,000 units per month. But despite its higher capacity, ES Ceramics’ estimated annual revenue of about RM25 million (annualising 1HFY2010 revenue of RM12.2 million) trails CeremTec’s more than RM30 million.

Wong says CeremTec, which has a longer history, commands better pricing due to its better product quality and consistency.

The industry is small. Other than ES Ceramics and CeremTec, there are fewer than five other manufacturers in Malaysia, whose capacity ranges from 10,000 to 50,000 units of hand formers a month.

“Malaysia is the largest producer of rubber gloves in the world. If our company is the biggest manufacturer of hand formers here, we are probably the biggest in the world,” says Wong.

But being the biggest hand former manufacturer is very different from being the largest rubber gloves producer. Top Glove Corp Bhd’s revenue reached RM1.53 billion in FY2009 ended Aug 31. This cannot be compared to the close to RM19 million in revenue for ES Ceramics in FY2009 ended May 31.

It is said that Top Glove’s FY2009 net profit of RM169.2 million alone is much bigger than the hand former industry’s total annual sales.

The reason for this is the long replacement period of hand formers  of eight to 15 months, depending on the intensity of the production run in the rubber glove plant. In other words, manufacturers of hand formers will not see a high turnover in their business.

Nevertheless, the upside for ES Ceramics could be attractive given that its stock is still trading at its lows and that the company has sorted out major issues arising from the acquisitions of GTR and Euroceramics.

Wong says the group plans to increase total running capacity over the next 12 months to 350,000 to 400,000 units per month, from 250,000 to 300,000 currently, in order to tap the increasing demand.

“The expansion of capacity would involve minimal additional investments of only a few hundred thousand. This is because the facilities and machinery are already in place, and it is just a matter of maximising usage. The more taxing issue is getting sufficient skilled workers to make the moulds,” says Wong.

ES Ceramics is also planning to beef up its share and working capital. Other than a bonus issue to “capitalise” its retained profits of RM6.3 million, the company plans to call for a rights issue of new shares to raise about RM5 million in additional capital.

The proceeds from the rights issue, says Wong, will mainly be used to pay down short-term borrowings in order to reduce the total interest costs of more than RM450,000 per quarter. The recapitalisation and capacity expansion are expected to improve ES Ceramics’ financial results as well as its cash flow.

But even with its current high gearing relative to earnings, Wong says ES Ceramics’ cash flow and liquidity remain healthy enough to service its debts.

“Our depreciation is quite high relative to earnings. Hence, it is better to look at the cash flow to have a better idea of our operating performance,” he says.

In 1HFY2010, the group’s interest costs of about RM935,215 and depreciation charges of RM1.32 million took a meaty portion of its six-months operating profit of RM3.56 million, leaving only RM1.16 million in net profit.

Still, in terms of cash flow, the group generated operating cash flow of RM1.41 million after paying its suppliers. And after it paid interest costs to the banks and income tax, there is still RM330,048 in terms of net operating cash flow.

Nevertheless, ES Cermics would have to raise fresh capital and ramp up its production for more revenue to substantially pay down the group’s total net borrowings of about RM24 million. This is what the company would be hoping to do after it going through the acquisition pains of the last four years.

This article appeared in Corporate page of The Edge Malaysia, Issue 794, Feb 22 – 28, 2010