KUALA LUMPUR: In view of volatile latex prices, glove manufacturers are switching over to producing nitrile gloves from rubber gloves.

The world’s top glovemakers, like Top Glove Corp Bhd and Supermax Corp Bhd, are switching over, since nitrile gloves command better margins than latex gloves and are less subject to price volatility.

The emerging trend in the industry is favourable to Luxchem Corp Bhd, which supplies nitrile (synthetic latex) to glove producers, such as Hartalega Holdings Bhd, Top Glove, Supermax, and Kossan Rubber Industries Bhd.

Tang Ying See, managing director of Luxchem, said the outlook for synthetic rubber is positive.

Already, the company is seeing bigger contribution from nitrile sales, Tan told The Edge Financial Daily. He explained that prices and demand for synthetic rubber depend on the supply and demand of natural rubber, and he believes the supply of natural rubber will be tight.

Luxchem does not manufacture nitrile, it sources the chemical from Zeon Chemicals of Japan, a leading developer and supplier of innovative polymers.

Luxchem’s trading division, including supplying nitrile, accounted for about 90% (RM119.77 million) of revenue. The division’s sales grew by 32.3% or RM 29.26 million to RM119.8 million for 2QFY11 from RM90.51 million in the previous corresponding period.  

Luxchem has seen brisk sales of its nitrile product in 2Q. Tang said the contribution from the supply of nitrile grew proportionally by 35% in 2QFY11.

For the first half of FY11 ended June 30, its trading division’s profit before tax went up by 29.8% to RM13.51 million from RM10.41 million a year earlier, while revenue increased by 25% to RM215.39 million from RM171.57 million.

For 6MFY11 ended June 30, the company’s accumulated net profit grew 17.5% to RM11.78 million or 9.06 sen per share from RM10.03 million or 7.71 sen per share the year before. Revenue expanded 26% to RM240.7 million from RM190 million in the previous corresponding period.

For FY10 ended Dec 31, Luxchem achieved net profit of RM20.48 million against RM19.13 million in the preceding year. Earnings per share stood at 15.75 sen compared with 14.72 sen for FY09.

Top Glove and Supermax are dedicating more of their production lines to nitrile gloves.

In its latest quarter report (3QFY11), Top Glove said its nitrile glove production had increased to 13% of its product mix compared with 11% in 2QFY11. It has targeted for its product mix to consist of 15% nitrile gloves by the end of this year.

Similarly, Supermax in its latest quarterly report (2QFY11) said market demand has shifted towards nitrile gloves and nitrile glove production forms 33% of its total glove production. It is ready to switch up to 40% to 45% should this demand shift gather momentum.

Luxchem made its debut on Bursa Malaysia in June 2008. The company has chalked up a compounded annual growth rate of 11.5% on its net profit over the past five years since FY06.

The company is generous with dividends, paying out in the past three financial years. For FY10, it paid a total dividend per share of eight sen, which translates into a dividend yield of 7.92%.

So far, Luxchem has declared a dividend per share of three sen for FY11.

Tang said Luxchem’s share in nitrile and related chemical additives is about 20% of the domestic market.

Hartalega, the world’s largest nitrile glove maker, used to source its nitrile directly from Zeon Chemicals before it was represented by Luxchem, said Kuan Mun Keng, director of Hartalega.  

Glovemakers are on investors’ radar but not Luxchem. The stock has drifted lower in the past few months from the year’s high of RM1.15 in May this year to RM1 last Friday. At RM1 per share, Luxchem’s shares are trading at price-earnings ratio of 6.35 times based on earnings in FY10.

Financially, the company has a strong balance sheet. As at June 30, the company had a cash balance of RM87.5 million, with no borrowing except for bankers’ acceptances of RM96.4 million.  

Other than the inputs for nitrile glovemakers, Luxchem also supplies fibreglass reinforced plastic, latex, polyvinyl chloride (PVC), and rubber.

Luxchem also has a manufacturing division mainly involved in producing unsaturated polyester resins (UPR), which it also trades.

Raw materials such as petroleum-based styrene monomer and glycol are used to manufacture UPR. Like most manufacturers, Luxchem is faced with volatile raw material prices, but Tang said  it has been able to pass down most of the price changes to its customers.

“A significant portion of cost increases could be imputed in selling prices to avoid reduction of our profit margin,” said Tang. “Nonetheless, we may absorb part of the price increases to remain competitive.”

Its manufacturing division accounted for about 18% of its revenue in 2QFY11 and 11% of its annual revenue in FY10.

Its UPR manufacturing plant is located in Melaka and has two reactors. The plant, which has an annual production of 20,000 tonnes, is currently running at 70% to 80% of capacity.  

On how the company stands out from its competitors, Tang said one advantage is that Luxchem serves as a one-stop supply centre for industrial chemicals and is able to provide synergies for cross-selling products. In addition, Luxchem has a strong market reputation and established record with over 700 customers in 14 countries.

This article appeared in The Edge Financial Daily, September 19, 2011.