Tuesday, June 28, 2011

RAM Ratings affirms Rubberex rating, lowers outlook to negative

KUALA LUMPUR: RAM Rating Services Bhd has reaffirmed the A2 rating of RUBBEREX CORPORATION (M) BHD []'s RM50 million medium-term notes (MTN) programme (2006/2013)'' but the outlook on the rating has been revised from stable to negative.

The ratings agency said on Tuesday, June 28 the operating environment is expected to remain challenging for the glove maker as raw material prices rise, while it has limited ability to pass on the higher costs to customers.

'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 two years,' it said.

RAM Ratings said 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 December 2010.

The company manufactures and sells vinyl, household and industrial gloves as well as it trades in personal protective products.

The ratings agency said the profit margins of Rubberex's household and industrial gloves divisions have also been thinning since 3Q of FY2010.

'While we expect Rubberex to be able to pass on its heftier latex costs to its customers, with a time lag of one to two months for industrial gloves and three to four months for household gloves, persistent escalation in latex costs would prolong the recovery of this segment's profit margin,' it said.

RAM Ratings said due to these factors and the stronger ringgit against the US dollar, Rubberex's operating profit before depreciation, interest and tax fell 14.2% on-year in FY2010, despite its stronger top line.

While revenue from the household- and industrial-glove divisions surged 30%'' on-year in FY2010, this failed to compensate the 4% drop in sales of vinyl gloves, which are Rubberex's core product.

Rubberex's pre-tax profit also fell from RM23.3 million to RM10.15 million on-year. The group's performance continued to deteriorate in 1Q FY2011; revenue shrank 14.3% on-year to RM78.31 million while operating profit before interest and tax was halved to RM3.37 million.

'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,' said RAM Ratings' head of consumer and industrial ratings Kevin Lim.

'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.'

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