We are initiating coverage on Careplus with a BUY call,
valuing it at RM0.56 based on 18x FY18F EPS of 3.1 sen. The discount of 20%
against the sector's PE average of 22.3x is due to: 1) its ACE Market listing
status; 2) small market share; 3) easily affected by changes in market
conditions and competition; and 4) it has yet to reach critical mass in its
production. However, we are bullish on the prospects of Careplus over its
carefully crafted expansion plan up to the year 2020.
ACE Market-listed glove manufacturer Careplus Group Bhd
thrives in an industry largely dominated by the “big four” — Top Glove Corp,
Hartalega Holdings, Kossan Rubber Industries and Supermax Corp. Careplus’ market
share may be less than 1% but its key advantage lies in its strong distribution
network in the Central and South American region. This region constitutes 69%
of Careplus’ revenue for FYE 2016. Being smallish in terms of market share, the
group is able to provide better service to customers who are normally ignored
by the "big four". The recent fall in latex prices amidst the
strong US dollar has boosted earnings and encouraged capacity building.
Careplus offers a unique opportunity to participate in its
expansion phase. It has set in motion to expand its capacity to produce as much
as 10 billion pieces of gloves annually by 2020. Its profit margin is projected
to rise from the current 3% to 5% as a result of better economies of scale and
its global market share growth from about 1% now to around 4% by 2020. Going
forward, Careplus is eyeing markets like China, India and North America to
absorb the additional capacity.
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