SHARES of ACE Market-listed Careplus Group Bhd, which has a production capacity of less than 10% of the world’s biggest glove maker Top Glove Corp Bhd’s, are trading at a price-earnings ratio (PER) of 48 times.

Careplus CEO Lim Kwee Shyan acknowledges that the company looks expensive in terms of PER compared with its industry peers, which are mostly trading at below 25 times.

He is confident that with higher sales revenue due to the weak ringgit and the ongoing capacity expansion plan, the company’s future earnings will catch up with its share price and this, in turn, will keep its PER in check.

The stock has surged 68% year to date, closing at an all-time high of 68 sen last Thursday after the company announced a proposed one-for-two bonus issue on April 2.

“It’s not just the bonus issue per se that triggered investors’ interest. I think investors are looking at the momentum of growth, given that we have put up a number of new production lines and our net profit last year looked good,” says Lim.

According to him, Careplus (fundamental: 0.6; valuation: 1.1) will be adding six new production lines, which are expected to increase its capacity by 1.2 billion pieces of gloves a year and bring its total capacity to 3.5 billion pieces a year by financial year 2016.

The expansion plan will cost the company between RM35 million and RM40 million.

As at end-2014, Careplus had three factories with 20 production lines and an annual production capacity of 2.3 billion pieces of gloves in Seremban, Negeri Sembilan. The production lines are running at a utilisation rate of 80%.

“With the expansion plan in place, we will achieve greater economies of scale with higher production volume … we should be able to command better sales to sustain our growth,” says Lim.

He adds that the weaker ringgit is favourable to Malaysian glove makers, including Careplus, which will become more competitive in the global market.

“In fact, the high PER gives us more pressure to seek earnings growth. But then again, we can bring it down easily by generating more profits,” Lim tells The Edge in a phone interview.

At the closing price of 68 sen, shares of Careplus are trading at a steep PER of 48.57 times, based on its earnings per share of 1.4 sen in the financial year ended Dec 31, 2014 (FY2014).

Larger glove makers Top Glove (fundamental: 2.5; valuation: 1.3) and Supermax Corp Bhd (fundamental: 1; valuation: 1.2) have a PER of 18.8 times and 13.7 times respectively (see table). Hartalega Holdings Bhd (fundamental: 2.6; valuation: 0.5) and Kossan Rubber Industries Bhd (fundamental: 2.1; valuation: 0.5) are trading at a PER of 25 to 26 times.

The smaller rubber glove firms, namely Integrated Rubber Corp Bhd (fundamental: 1.8; valuation: 0.3) and Rubberex Corp (M) Bhd (fundamental: 1.4; valuation: 2.6) are trading at a PER of 81.1 times and 16.3 times respectively.

Lim says most of the stock valuations are based on historical data, but at the moment, there is no solid reason to justify the seemingly sky-high valuation of Careplus’ shares.

The company made its debut on Bursa Malaysia in December 2010. From an initial public offering price of 23 sen apiece, its share price shot up to 51.6 sen in July 2011, before falling to a record low of 26.3 sen in February 2013. The stock’s performance had remained lacklustre for more than a year until November last year when it gradually climbed to 55.5 sen. On average, it has been trading at 35.3 sen since it listed.

For FY2014, Careplus saw its revenue increase 18% to RM152.1 million, up from RM129.1 million for the 11 months ended December 2013.

Its net profit more than doubled from RM1.3 million to RM3.3 million over the same period. The company has declared a first and final single-tier dividend of 0.25 sen per share for FY2014, but the entitlement date has yet to be fixed.

Before Careplus changed its financial year end to Dec 31, it posted a net profit of RM3.1 million in the financial year ended Jan 31, 2011 (FY2011), followed by RM1.98 million and RM2.9 million in FY2012 and FY2013 respectively. The group’s revenue had increased steadily from RM47.2 million in FY2011, to RM55.5 million in FY2012 and RM97 million in FY2013.

In terms of its balance sheet, Careplus is in a net debt position. As at Dec 31, 2014, it had long-term debts of RM30 million and short-term debts of RM67.6 million, with cash and bank balances of less than RM3 million.

Through Careglove Global Sdn Bhd — a joint venture with Brazilian company Descarpark Descartaveis do Brasil Ltda that was set up in 2011 — the group manufactures gloves for the Brazilian market, which accounts for about 60% of the group’s total sales.

On April 2, Careplus proposed a bonus issue of 170 million shares, on the basis of one bonus share for every two existing shares. The corporate exercise is to encourage trading liquidity and greater participation by investors in its shares, as well as to broaden its shareholder base.

With a share base of only 235 million, Careplus’ shares are considerably illiquid — the 30 largest shareholders held a 75.7% stake in the company as at April 15 last year.

Interestingly, the major shareholders have been gradually increasing their stakes in the company in the past 12 months. The latest filings with Bursa reveal that Lim and his spouse, Ng Shu Si, collectively hold a 35.75% stake and Careplus non-executive chairman Yew Nieng Choon has 26.03% equity interest.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on April 13 - 19, 2015.

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