This article first appeared in The Edge Financial Daily, on October 27, 2015.

ES Ceramics Technology Bhd

The rubber glove industry will be going through a major expansion exercise over the next five years. This comes as local glove giants aim to boost their annual production capacity, with the top four players — Top Glove, Hartalega, Kossan and Supermax — collectively announcing plans to spend over RM3 billion as part of their long term capacity expansion plans.  

Top Glove will be adding annual capacity totaling 7.8 billion gloves over the next two years. Over the much longer term, Hartalega plans to add annual capacity of 28.4 billion gloves, Kossan 22.0 billion gloves and Supermax 10.8 billion gloves.

These major expansion exercises will drive demand for ceramic hand formers, which are used in the glove industry. ES Ceramics (Fundamental: 2.55/3, Valuation: 0.8/3) is one such company that focuses on producing hand formers for production of medical gloves, household gloves, surgical gloves and industrial gloves.

Earnings for FYMay2015 jumped more than two-fold to RM5.6 million, due to better sales mix of premium products and production efficiency.

Notably, it has made a comeback since recording losses in FY2011. The losses in FY2011 were due to one-off charges arising from goodwill impairments and inventories written-off, which came after it underwent an internal restructuring to improve operational efficiencies and focus on higher margin products.

Between FY2012–FY2015, revenue grew from RM19.9 million to RM25.0 million. Meanwhile, net earnings grew at a faster pace from RM1.1 million to RM5.6 million, as margins improved. Its EBITDA margins rose from 22.1% to 29.3%.

In the same period, the company generated sturdy free cash flows, ranging between RM4.6–7.7 million. This has allowed it to build-up a strong balance sheet, with gearing pared from 37.0% in FY2012, to net cash of RM13.8 million as end-May 2015.

The stock trades at trailing P/E of 15.1 times, which is attractive relative to its growth, while the listed glove companies are trading at 16.0-40.4 times earnings.