Company Focus

Malaysia Equity Research PP 11272/8/2004 15 June 2004

Adventa Berhad
A glove manufacturer striving to compete globally
Second Board bound Adventa manufactures and distributes sterile surgical gloves and medical examination gloves. The Groups future strategies include expanding its core activities and diversifying its product range into surgical tapes and electrocardiogram electrodes. Attaching a P/E multiple of 13x on the Groups calendarised Dec 04 EPS of 2.5 sen, we have pegged a fair value of RM0.33 for Adventa shares. A manufacturer of disposable medical gloves. The Group began its business of manufacturing and distributing medical examination gloves in 1988. Since then, it has expanded to the manufacturing and distribution of surgical gloves. Combined, its present total annual production capacity stands at 940m pieces. About 98% of the Groups products are exported to the US, the EU, the Middle East, Africa and Asia. Its products have been certified and endorsed by international standards such as the US Food and Drug Administration (USFDA), the EUs ISO standards for medical devices and CE Mark. Diversifying to survive in a competitive environment. Going forward, Adventa will face tough competition from multinationals and large local corporations such as Ansell, WRP, Top Glove and Supermax. As part of its strategy, management plans to focus more on the surgical gloves business segment, which offers better margins. In addition, the Group wants to diversify into the manufacturing of surgical tapes and electrocardiogram electrodes, as well as venture into biomass power generation to reduce costs.

Issue Price: RM0.30 Fair Value: RM0.33

Closing on: 15 Jun Listing on: 25 Jun
At a Glance
Sector: Industrial Products Issue Statistics:
LISTING DETAILS Affin Issue Manager: Merch Funds Raised (RMm): 57.0 Shares on offer (m): 202.5 New Shares (m): 190.0 Vendor Shares (m): 12.5 Placement Shs (m): 172.5 Public Offer (m): 30.0 POST LISTING Ord Share Cap (m): 450.0 Mkt Cap (RMm)*: 148.5 Est Free Float %: 45.0 * Based on our RM0.33 fair value

USE OF PROCEEDS (RMm) Working capital 29.8 14.7 Our fair value is at RM0.33 /share. We have set a target P/E multiple of 13x for Adventa Capex 10.0 shares, based on a 10% discount to our implied target P/E of 14.3x for Kossan Rubber. Repayment of loans 2.0 Based on the Groups calendarised Dec 04 prospectus EPS forecast of 2.5 sen, we have Est. listing expense R&D 0.5

arrived at a fair value of RM0.33/share. At this price, Adventec is valued at a market capitalisation of RM148.5m. Earnings & Valuations
FY (RMm) Turnover EBITDA Pre-Tax Profit Net Profit EPS (sen) * EPS Growth (%) P / E Ratio (x) ^ DPS (sen) Div Yield (%) ^ ROE (%) Book Value (RM) P / Book Value (x)^ Jan-02A Jan-03A 51.5 63.5 5.5 7.2 2.8 4.5 2.2 3.8 0.5 0.8 (41.3) 60.0 66.0 41.2 n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m.

Historical Financial Summary

Jan-02A Jan-03A Jan-04A Jan-04A Jan-05F FY (RMm) 51.5 63.5 92.1 92.1 123.7 Turnover 5.5 7.2 10.8 10.8 n.a. EBITDA Pretax Profit 2.8 4.5 5.3# 5.3# 14.3 Net Profit 2.2 3.8 5.1 11.8@ 5.1 1.1 2.6 Margin Analysis (%) 10.7 11.3 11.7 37.5 136.4 EBITDA Pretax Profit 5.5 7.1 5.7 30.0 12.7 Net Profit 4.4 6.0 5.5 n.m. 0.6 n.m. 1.8 # includes an exceptional loss of RM2.1m arising n.m. n.a. from a write-off of advances to a former shareholder 0.20 n.a.

Management:
Low Chin Guan Kwek Siew Leng MD ED 45.0% 10.0%

Ownership:
Low Chin Guan Wong Koon Mei

Business Description:
Key Activities & Products: Sterile surgical gloves, medical examination gloves, other medical and hospital related products. Customers: Hospitals, Healthcare procurement centres. Suppliers: Suppliers of latex, fuel and packaging materials. Geographic Spread: Export (US, EU, Middle East, Africa and Asia) 98%; Domestic 2%.

n.m. n.m. 1.7 n.a. 450 450 450.0 450 * - Based on enlarged share capital of 450m ^ - Based on our fair value of RM0.33 F - Based on prospectus forecast # includes an exceptional loss of RM2.1m arising from a write-off of advances to a former shareholder @ includes pre-acquisition profit of RM0.98m

MALAYSIA

Listed Peers
Stock Name Mkt Cap (RMm) Kossan Rubber 249.1 Supermax 314.5 Top Glove 645.8 Seal Polymer 190.4 Current PE (x) 10.7 12.0 15.1 9.1

Sector Historical Valuation

n.a.

Malaysia Research Team 603-2711 2222 general@hwangdbsvickers.com.my

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Refer to important disclosures at the end of this report

Company Focus

Adventa Berhad

Background
Historical background. The Adventa Group began operations as a manufacturer of examination gloves in Kuala Lumpur in 1988. In 1990, it received the US Food & Drug Administration (USFDA) approval for the export of its medical examination gloves to the US. The Group subsequently moved its operations to Kota Bharu, Kelantan to capitalise on the readily available labour there. Through the years, Adventa expanded its annual production capacity (from < 10m pieces initially to 940m pieces now), widened its geographical reach (by venturing into the European markets) and diversifying into the manufacturing and distribution of surgical gloves. The Groups manufacturing plants are currently located in Kota Bharu and Kluang. Its product range is as follows:
Type of gloves Surgical Gloves Surgical Glove Powderfree Surgical Glove Prepowdered Synthetic Surgical Gloves Powderfree Orthopaedic Surgical Gloves X-Ray Protection Surgical Gloves Examination Gloves Latex Examination Gloves Latex Examination Gloves, Powderfree Latex Examination Gloves, Sterile/Powderfree Latex Gloves, Powderfree Nitrile Examination Gloves, Powderfree Dental Gloves Latex Examination Gloves Latex Examination Gloves, Powderfree Source: Company Prospectus Usage Operating Room, General Surgery Operating Room, General Surgery Latex free, General Surgery Orthopaedic, Trauma Cardiology-Orthopaedic Surgery

Patient Contact, Cleaning, Laboratories Patient Contact, Cleaning, Laboratories Patient Contact, Cleaning, Laboratories Emergency Medical Service / Trauma / Chemotherapy Patient Contact, Cleaning, Laboratories

Dental Procedures Dental Procedures

In terms of sales mix, for the FY ended Jan 04, the Groups output ratio of surgical to examination gloves stood at approximately 60:40. Adventa has several brands of products that are patented, and in light of the growing acceptance of the Groups own brands, it plans to increase the ratio of own brand manufacturing to original equipment manufacturer (OEM) products from 55:45 currently to 80:20 within the next three years. The Groups products have obtained approval and endorsement of the following international standards/regulations:
Australia Turkey Czech Republic Source: Company Prospectus USA European Union US Food and Drugs Administration ISO13488 / EN485 for medical devices CE Mark Therapeutic Goods Administration Turkish Standard Institute Electrotechnical Testing Institute

Export-driven business. 98% of the Groups output was exported in last financial year, primarily to the US, Europe, the Middle East, Africa and Asia. The sales breakdowns by geographical areas, for both surgical gloves and examination gloves, are presented in the pie charts below: Surgical gloves sales distribution, FYE Jan-04
Af rica 3% Europe 34% Americas 24%

Examination gloves sales distribution, FYE Jan-04

Europe 17% A f rica 5%

Middle East 24%

Asia 15%

Middle East 21%

A mericas 52% A sia 5%

Source: Company Prospectus

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Company Focus

Adventa Berhad

Surgical gloves contributes the most profit. In terms of percentage breakdowns of revenue and gross profit by product type, surgical gloves contributed 52% of overall revenue, and accounted for 60% of total gross profit for FY ended Jan 04 (see pie charts below). Revenue by products, FYE Jan-04
Others 12% Surgical gloves 52%

Gross profit by products, FYE Jan-04

Distribution 14% Surgical gloves 60%

Examination gloves 36%

Examination gloves 26%

Source: Company Prospectus

The bigger percentage profit contribution from surgical gloves is mainly due to its higher gross margins. For example, for the last financial year, gross profit margin for surgical gloves came in at 26%, versus examination gloves margin of 16%. The gross profit margin trend for both surgical gloves and examination gloves in the past five years is shown in the table below: Gross profit margins
31-Jan-00 % 35 27 28 Financial Year Ended 31-Jan-01 31-Jan-02 31-Jan-03 % % % 25 23 25 23 16 16 27 24 19 21 31-Jan-04 % 26 16 26 22

Surgical gloves Examination gloves Distribution Average gross margin Source: Company Prospectus

Prospects
Rising global demand for disposable gloves. Global demand for gloves is growing on the back of heightened awareness of personal hygiene following the SARS disease and avian flu health scares. Among the biggest glove markets in the world are in the US and Europe. In 2002, sales of disposable gloves in the US was estimated at 20.15bn units valued at US$1.1bn, whilst in Europe, the market was valued at US$304m with a total volume sales of 4.8bn units. Going forward, glove sales in the US and European markets is projected to grow to 22.2bn and 5.7bn units, valued at US$1.2bn and US$362.9m respectively, by 2008. In Malaysia, sales of disposable medical gloves were estimated at 38.35bn pieces valued at US$852m in 2002. Examination gloves made up the bulk of the overall sales, whilst surgical gloves accounted for only 23.5% of the market. But moving head, it is anticipated that Malaysias sales will grow to 53.2bn units valued at US$1.1bn by 2008. This will be led by growing sales of surgical gloves, which is expected to increase during the forecast period due to strengthening demand in this sub-sector. But competition is rife. The rubber glove industry in Malaysia has gone through some tumultuous times with fierce competition from neighbouring countries, price undercutting and rising production costs. However, following some industry consolidations, the number of players has declined to some 70 companies currently, compared to 133 in 2000. Broadly, there are two categories of gloves manufacturing companies: the first being multinational companies (such as Ansell and WRP) and large Malaysian companies (such as Top Glove, YTY and Supermax), whilst the second tier comprises small to medium companies and local importers. Adventa is a relatively small player in the local scene. In terms of plant size, Adventas current combined production capacity, at 940m units p.a., stands well below the annual capacity of Top Glove (7.2bn), Supermax (3.1bn), Kossan Rubber (3.0bn) and Seal Polymer (2.2bn). However, Adventa has successfully created a niche in the surgical gloves market segment, with an estimated market share of 15% in 2002, behind Ansell (25%) and WRP (20%).

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Company Focus

Adventa Berhad

Focussing more on the surgical glove business. Given its niche position, and the lure of higher operating margins, the Group will be focussing more on its surgical glove business ahead. As part of its strategy, the Group has set aside RM6.5m from the IPO proceeds to extend its existing surgical glove factory in Kota Bharu, by adding two more glove production lines to the current four production lines. This expansion, which will increase its production capacity by 35% p.a., is scheduled for completion by 3Q04. Upon the commencement of operations, the extra capacity is expected to add a potential RM23.0m in revenue p.a. going forward. Separately, the Group plans to increase the production capacity of its Johor examination glove plant by 50% for the financial year ending Jan 05, from its current capacity of 150m pieces p.a. Another strategy is to diversify into new ventures. Under the Groups diversification plans, Adventa will invest RM5.2m to construct a biomass plant to supply energy and electricity. The plant, which is already 80% completed, is due for commissioning by mid-04. Expected to produce 10.0MW of energy and 1.5MW of electricity upon its first full year of operations, the biomass plant will be able to reduce fuel and energy costs for the Group, translating to a cost saving of RM1.0m every year. At later stages, management expects the plant to rake in incremental revenue of approximately RM2.0m p.a. for the Group. Also in the works are plans to diversify into a range of disposable surgical operating room products, the manufacturing of surgical tapes and electrocardiogram electrodes. The Group has allocated RM3.0m of the IPO proceeds to purchase equipment and surgical coating equipment for this purpose. Cost factor. Whilst the Groups turnover is anticipated to grow in tandem with the rising gloves demand, operating profit performance is dependent on price fluctuations for commodities especially latex and fuel, two key raw materials used to make gloves. In the listing prospectus, Adventa is confident that the rise in average selling prices of gloves will more than offset any increase in overall production cost, with a projection that pretax profit margin (before exceptional items) will widen from 8.0% in FY Jan 04 to 11.5% in FY Jan 05. Proforma NTA of RM0.20. Meanwhile, the Groups financial position is expected to strengthen slightly after the flotation exercise. In particular, following the RM10.0m debt repayment using part of the IPO proceeds, total long term borrowings for the Group will be reduced from RM17.8m previously to RM7.8m post-listing. This is expected to translate to interest savings of approximately RM0.8m p.a. Meanwhile, based on the proforma balance sheet, the Groups NTA per share stands at RM0.20. Our fair value is set at RM0.33. To arrive at our target price for Adventa shares, we have used a benchmark P/E ratio of 13x, representing a 10% discount to our CY04 implied target P/E for Kossan Rubber (the only listed latex-based glove manufacturer on Bursa Malaysia currently under our coverage) of 14.3x. [Englotech, another listed glove manufacturer followed by us, was not considered as its products are make for industrial usage). We reckon the valuation discount is warranted given Adventas lower production capacity and smaller share capital. Based on the prospectus calendarised Dec-04 EPS projection of 2.5 sen, we have arrived at a fair value of RM0.33 for Adventas shares. (Please see table overleaf for a comparison of financial and operating data between Adventa and the other listed latex-based glove manufacturers). However, on the back of the prevailing weak market sentiment, we suspect Adventa shares might come under selling pressure upon listing, as can be seen from the current performance of Seal Polymers share price. Essentially, the share price of Seal Polymer, a manufacturer of rubber examination gloves which was listed on 8 Apr 04, have trended down from an opening high of RM2.15 to a recent low of RM1.25. At yesterdays closing price of RM1.35, the stock is trading at a P/E ratio of 9.1x CY04 calendarised EPS, below our target P/E of 13x for Adventa shares.

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Company Focus

Adventa Berhad

Stock Comparison
Calendarised Current Implied target NTA / P/B Target Market cap Production 2004 EPS P/E P/E based on share P/B 14-Jun-04 capacity CY04 EPS (p.a.) (RM) (sen) (x) (x) (RM) (x) (x) (RM m) (m units) Adventa Jan n.a. 2.5 n.a. 13.2 0.20 n.a. 1.7 148.5 0.94 Kossan Rubber* Dec 3.74 34.9 10.7 14.3 1.88 2.0 2.7 249.1 3.00 Top Glove^ Aug 6.95 45.9 15.1 n.a. 1.55 4.5 n.a. 645.8 7.20 Supermax^ Dec 3.90 32.6 12.0 n.a. 1.24 3.2 n.a. 314.5 3.10 Seal Polymer^^ Feb 1.35 14.9 9.1 n.a. 0.67 2.0 n.a. 190.4 2.20 Average 11.7 Source: Hwang-DBS Vickers Research, Company Prospectus, Reuters Estimates, Bloomberg * Based on Hwang-DBS Vickers forecast ^ Based on consensus estimates ^^ Based on prospectus forecast FY Share price 14-Jun-04 HDBSV Target Price (RM) 0.33 5.00 n.a. n.a. n.a.

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