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KUALA LUMPUR: Kenanga Investment Bank Research is optimistic over Mah Sing Group Bhd's venture into glove manufacturing as it expects the average selling prices of gloves to remain elevated through 2022 due to supply tightness.

"We think that Mahsing’s venture into the glove industry is not too late," it said, adding that it expects the group to achieve a payback period of 1.5 to two years on the capex of about RM150mil.

In addition, it said Mah Sing's balance sheet size and existing experience within the plastic manufacturing industry will provide the edge to jumpstart operations quicker and more competitively.

"We upgrade FY21 earnings by RM84m (or 75%) to RM196m after incorporating the new stream of earnings derived from its glove segment," it said.

Kenanga assumes ASPs of US$55 per 1,000 gloves and have conservatively assumed Mah Sing to only sell its first batch of gloves in July 21 due to potential teething issues.

It has also made a conservative cost assumption of US$30 per 1,000 gloves as compared to Mah Sing's guidance for US$25-27 per 1,000 gloves as the latter may have to pay premiums to obtain part supplies amid a shortage.

Kenanga upgraded Mah Sing to "outperform" with a higher sum-of-parts target price of RM1.05.

With the new segment, it switched its valuation method to sum-of-parts whereby it values the new gloves segment at 10x FY21 price-earnings.

"We choose to only apply a PE of 10x for the division vs the 18.4x average PE ascribed to our big 4 coverage (Topglov, Harta, Kossan and Supermx) given the huge difference in capacity sizes, industry experience and also the fact that Mahsing’s operations have not come on stream yet – which could face start up hiccups," it said.