RAM Ratings reaffirms Rubberex's rating; outlook revised from stable to negative

Published on 28 June 2011

RAM Ratings has reaffirmed the A2 rating of Rubberex Corporation (M) Berhad’s (Rubberex or the Group) RM50 million Medium-Term Notes (MTN) Programme (2006/2013). However, the outlook on the rating has been revised from stable to negative. Rubberex is involved in the manufacture and sale of vinyl, household and industrial gloves as well as the trading of personal protective products.

The revision of the rating outlook primarily reflects RAM Ratings’ concerns on Rubberex’s vinyl-glove business. The Group’s China-based vinyl-glove operations have been affected by overcapacity in the region following the entrance of many new players and the doubling of production from existing manufacturers in the last 2 years. The situation had exerted downward pressure on selling prices and made it challenging for the Group to pass on the higher raw material costs, which trimmed the Group’s margins for FY Dec 2010.

Meanwhile, the profit margins of Rubberex’s household and industrial gloves divisions have also been thinning since 3Q FY Dec 2010. While we expect Rubberex to be able to pass on its heftier latex costs to its customers, with a time lag of 1-2 months for industrial gloves and 3-4 months for household gloves, persistent escalation in latex costs would prolong the recovery of this segment’s profit margin.

Against these backdrops and the stronger ringgit against the US dollar, Rubberex’s operating profit before depreciation, interest and tax descended 14.2% year-on-year (y-o-y) in FY Dec 2010, despite its stronger top line. While revenue from the household- and industrial-glove divisions surged 30% y-o-y in FY Dec 2010, this failed to compensate the 4% drop in sales of vinyl gloves, i.e. the Group’s core product. Rubberex’s pre-tax profit was also slashed from RM23.3 million to RM10.15 million y-o-y. The Group’s performance continued to deteriorate in 1Q FY Dec 2011; revenue shrank 14.3% y-o-y to RM78.31 million while operating profit before interest and tax was halved to RM3.37 million, mainly due to the aforementioned factors.

“In the near team, the operating environment is expected to remain challenging. As input prices are expected to continue rising, Rubberex’s margins are envisaged to weaken amid its limited ability to pass on the higher costs to its customers,” opines Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings. “Going forward, we do not expect Rubberex to take up additional borrowing this year as its expansion has been put on hold amid the current oversupply of vinyl gloves. As such, the Group’s funds from operations debt coverage is envisaged to remain around 0.2–0.3 times while its gearing ratios are seen to hover at about 0.6-0.9 times.”

Meanwhile, the rating remains supported by Rubberex’s established market positions as one of the top 5 vinyl-glove producers in the world and among the larger and more established manufacturers of household and industrial gloves in Malaysia, relatively resilient demand for vinyl disposable gloves, and its moderate balance sheet. Nonetheless, these positives are offset by the Group’s vulnerability to input price volatility and shortages in the supply of raw materials, besides its exposure to foreign-exchange risk.

The rating outlook could be revised to stable should Rubberex’s operations in both China and Malaysia demonstrate sustainable improvement in their profit margins. On the other hand, the rating could be downgraded if the operating environment continues to deteriorate and both Rubberex’s operations continue experiencing thinning margins that further erode its debt protection metrics.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my