This article first appeared in Capital, The Edge Malaysia Weekly on April 17, 2017 - April 23, 2017

EVERSAFE Rubber Bhd’s listing will give it the boost it wants to upgrade its manufacturing prowess and reach out to new markets further afield.

The Ipoh-headquartered group — which started out as a small outfit 50 years ago, in 1967 — will reach a milestone when it debuts on the ACE Market this Friday.

Some 78 million shares will be available in the initial public offering, representing 32.42% of the company’s equity — comprising 48 million new shares (19.95%) and 30 million existing shares (12.47%) offered for sale.

At an IPO price of 36 sen per share, Eversafe is raising RM17.28 million in gross proceeds (RM14.1 million net proceeds) and a market capitalisation of RM86.6 million upon listing.

Eversafe is in the niche business of tyre retreading, which involves using natural and/or synthetic rubber to manufacture products for replacing the treads on spent tyres.

Its core business is in the development, manufacturing and distribution of tyre retreading materials but its wholly-owned subsidiary, Olympic Retreads (M) Sdn Bhd, is in tyre retreading operations under its own brand, “OLP”.

Eversafe’s customers are mainly tyre retreaders and rubber material traders, fleet operators as well as tyre retailers. Its main customer base is in Malaysia, where it controls around 22% of the market. It exports to at least 23 other countries.

Exports contributed to 55% and 57% of Eversafe’s total revenue in FY2015 and FY2016 respectively.

“We view these markets as areas for growth and our future plans and growth strategies are designed to capitalise on these opportunities,” Eversafe says in its prospectus dated March 31.

Apart from selling to Asean countries, Eversafe is venturing further afield to South America, particularly Brazil, which it sees as an important growth area.

It has already identified a business partner in South America to collaborate on distribution and is in the process of finalising the details of a joint venture with its business partner to build a tyre retreading plant, which is expected to commence operations in mid-2018.

Eversafe is also planning to set up an office and storage facility in Eastern Europe by mid-year to better service the entire European market.

But more than finding new markets, Eversafe is allocating the lion’s share of the funds raised to upgrade its own manufacturing capabilities.

It intends to spend RM12.58 million, or 72.8% of the IPO proceeds, on new manufacturing lines and automation systems. This forms part of the group’s strategy to enhance product quality and widen its range of products with a specific focus on high value-added and premium products, which have better gross profit margins.

The move towards better margin and premium products is already starting to bear fruit. Eversafe’s revenue has been falling year on year to RM55.07 million for FPE2016 from RM80.82 million in FY2013. Nevertheless, net profit rose to RM7.45 million in FPE2016 from RM6.56 million in FY2013.

Last year, net profit grew 27.8% to RM7.45 million from RM5.83 million in FY2015 on the back of a 26.87% drop in revenue to RM55.07 million from RM75.3 million in FY2015.

The improved gross profit margin — 25.7% last year from 22% in FY2013 — are attributed to higher-margin products and weaker commodity prices.

Eversafe acknowledges that it does risk volatility in raw material prices, particularly natural rubber, which forms about half its input material, as well as foreign exchange fluctuations. Generally, it is able to pass on price volatility in raw material costs to customers and only faces a risk when there is a prolonged material increase in natural rubber prices, it adds.

In recent years, however, the market price of SMR 20 grade natural rubber has been under downward pressure, falling 39.4% from January 2011 to January 2017. The price of synthetic rubber, meanwhile, is set through negotiations with suppliers.

On foreign exchange risks, Eversafe’s export revenue is mainly transacted in US dollars and yen, while the import of raw materials is mainly US dollar-denominated.

Eversafe’s IPO price is 1.3 times its pro forma book value of 28 sen per share as at Dec 31, 2016, according to its prospectus.

TA Securities’ has a 37 sen fair value for the stock, based on 11 times 2017 earnings per share as it expects Eversafe’s growth to be buoyed by its established market share and expansion to South America.

Public Invest Research has set a higher fair value for Eversafe at 40 sen per share, based on 10 times price-earnings ratio from its FY2017F EPS estimates.

Mercury Securities Sdn Bhd is the principal adviser, sponsor, sole underwriter and placement agent for Eversafe’s IPO.

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