Careplus - exciting growth in the plus
A
lot has been asking me what is the next tip, but I do not have tips,
just some insights on which kind of stock you should be holding if you
are a growth momentum trader like me. I came across Careplus during last
weekend due to its recent surge, and it looks like an interesting one,
but do note that this company is quite highly geared.
TP: RM0.75
Current price: RM0.495
Market cap: RM113m
Upside: 51%
(A) Company Background
-Careplus
was listed on Ace market on Dec 2010. It has been in the glove business
for more than 20 years. Careplus is a rubber glove maker, primarily on
latex but recently has expanded its nitrile division too (higher
margin).
-In 2011, it has formed a JV with Descarpack, a
company incorporated in Brazil, and Careplus has sold 50% of its share
in Careglove Global to Descarpack for RM4m. This was later use to expand
its second phase growth, adding 9 production lines in Careglove Global.
Now, 80% of Careplus’ sales has been channeling to Brazil due to
Descarpack. Who is Descarpack then? Descarpack is also Careplus’ major
customer, which has more than 20 years experience in the glove
making/medical field in Brazil.
Capacity and expansion plan
(i) Since IPO, they started with 420m annual capacity (6 single old lines – about 6m per month per single line), revenue were about RM40m at that time, thus we may safely assume that 10m gloves will generate about RM1M worth of revenue . The factor used in my assumption will be 0.1.
(ii)
With the emergence of Descapack, the company started Careglove Global,
and from 2011 to 2012, it has 5 new double lines (about 15m per month
per double lines) and 4 new single lines (about 10m per month per single
line), thus increasing the capacity to 1.86b as at Dec 2013.
(iii)
The company has will be expanding another phase (not under Careglove
Global), and 1 new single line will be starting in July 2014 and another
one on Q4 2014 and 2 new double lines to be starting production on Q1
2015.
(iv) In 2013 annual report, it was stated that the
company intend to expand Plant 2 of Careglove Global and it is pending
the approval for relevant authorities. I expect this to be coming in
within 2 years time. Another 1billion annual new capacity?
(v)
They also stated the plan for Factory 4 is to increase up to 12
production lines. As of now, they only have 17 lines, with 2 more coming
in Q1 2015 and 8 more coming up! Another 1 billion annual new capacity?
(B) Shareholders
Lim Kwee Shyan – 28.1%
Lim Kwee Shyan – 28.1%
Thinking Cap Sdn Bhd – 12.9%
Ng Shu Si – 6.4%
Chan Pek Harn – 6%
Yew Nieng Choon – 3.3%
Free float – 43%
The shareholders has been aggressively buying back their shares from RM0.35 to RM0.42, they sold some of their warrants that were out of the money to buy more shares in the company, in my opinion, or they could have sold their warrants to related parties, who knows?
Warrants exercise price – RM0.49, recently warrants have been very active, probably because it is now going to be in the money.
(C) Financial analysis
Revenue
To
look at Careplus’ potential, we must ascertain its future revenue, or
in this case, forecasted FY2014 and FY2015’s revenue. Using utilisation
rate of only 85%, due to its expansion profile, FY2014 should be able to hit RM165m (85% x 1940 annual capacity x 0.1), and FY2015 should be able to hit RM210m
(85% x 2500 annual capacity x 0.1). Of course utilisation rate will
improve going further as all the new lines are commissioning well.
PAT
There are 2 factors that will drive the PAT margin upward:
(i) USD strengthening
– USD has generally strengthened from about an average RM3.15/USD to
RM3.25/USD from 2013 to 2014. That is about 3% increase, and the company
usually hedge and lock in the sales at certain currency rate before
they produce, even that, while the trend is up, the company will be
locking in higher and higher rates, thus translating into more revenue
to Careplus! If USD could sustain at USD3.3-3.4 in FY2015, we could see
another 3% gain in FY2015. All the USD gain will be directly translated
into profits! However, the company has a term loan of RM15m in USD which
is paying 3.6% interest, that will be very minimal impact to its
finance cost and PAT. Here, if we assume 1.5% USD gain for FY2014 & FY2015, there will be additional RM3m and RM4m to bottom line!
(ii) Latex price softening –
Latex price has been decreasing on average about 10-15% from January
2014, that is why you could see higher margin from Q2 2014 despite lower
revenue.
As
you can see on H1 2014, the company generated RM4.3m worth of PAT, that
is about 6% PAT margin, and PAT margin has been increasing. The margin
experienced in FY2012 and FY2013 were distorted because the company was
on an expansion spree, thus a lot of commissioning and pre-commissioning
works have to be done, and this explained why the margin has been
increasing.However, to match its peers' PAT margin, the company has to
slowly decreased its debt to decrease its finance expenses as its
leverage is considered to be on the high side now. But this could be
achieved when more and more lines and cash flow comes in. The company's
free cash flow is expected to be positive in FY2015.
To give a grasp of its peers on PAT margin:
(i) Hartalega - 21%
(ii) Supermax - 11.5%
(iii) Kosan - 11%
(iv) Topglove - 8.8%
Net Gearing or (Debt –Cash)/ Equity
Net
gearing as of 1.1x as at H1 2014 is pretty reasonable given its growth
profile. If the company is going to embark another plans for Careglove
Global, I would expect another private placement to be done next year.
(D) Valuation
If you do follow other glove stocks, they are trading at:
(i) Hartalega - 23x (Given its premium due to its market leading position in Nitrile)
(ii) Topglove – 17x
(iii) Supermax – 14x
(iv) Kossan – 17x
Given
Careplus’ capacity growth per year to be more than 15-20%, I am pegging
it to a P/E of 14x, same like Supermax. Therefore, with PATMI of
RM12.5m in FY2015, Careplus should be trading at RM0.75.
(E) Technical analysis
Careplus
attempts to break all time high RM0.52 yesterday, and it has failed to
do so, now, it is consolidating, and I am sure breaking RM0.52 is just a
matter of days.
S1: RM0.455, S2: RM0.415
R1: RM0.52, R2: RM0.58, R3: RM0.66
(F) Risk reward ratio
(i) Upside return of 50% - I think my calculation is quite prudent, just 14x, some will be valuing at 16-18x because of its strong growth.
(ii) Downside risk of 10% AT RM0.45 - USD weakens? Descarpack bankrupt?
R/R ratio: 4 times.
(G) Rerating factors/ Catalysts
(i) The commencement of Plant 2 for Caregroup Global, another 1 billion new capacity?
(ii) Ebola worsen
(iii) Potential takeover target, as the capacity will double from 1.8billion in 2 years time.
(iv) No research house covers this stock yet at the moment if I am not mistaken.
(v) By next 2 years, Careplus could potentially move to Main market if it exceeds RM20m of PAT within 3 years.
(vi) 8 more upcoming new lines on Factory 4 would increase 40% of Careplus’ capacity
Cheers. I think RM0.70 is very much achievable if USD remains strong next year and there are no major hiccups on Careplus’ expansion plan. Appreciate your feedback on my analysis.
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