GLOVE making has lost its allure, as demand tapers with the Covid-19 pandemic and the market struggles to absorb excess manufacturing capacity. The management of Enviro-Hub Holdings : L23 -7.55%, however, is confident that its decision to diversify into the healthcare sector will serve its shareholders well over the medium term.

 

Enviro-Hub is among the Singapore Exchange-listed companies that announced a diversification into glove making last year &ndash through the acquisition of Malaysian glove manufacturer Pastel Glove for S$46.8 million.

 

The company&rsquo s share price hit an all-time high of S$0.102 on Jan 13, 2021, a day after first announcing the diversification. The stock has since fallen some 52 per cent from that high, to S$0.049 as at Nov 15. At that level, Enviro-Hub has a market capitalisation of S$81.5 million and trades at 23 times its FY2021 earnings.

 

This decline mirrors that at other glove manufacturers, whose revenues have more than halved as a result of lower average selling prices (ASPs) and stiff competition from Chinese entrants. Top Glove and Riverstone Holdings, both Malaysia-based glove makers with Singapore listings, have seen their share prices decline by 75 per cent and 34 per cent, respectively.

 

Enviro-Hub does not disclose how much of its revenue comes from Pastel Glove. The company posted a 29 per cent increase in revenue to S$22.8 million for the first six months of 2022, and a 43 per cent rise in profit to S$739,000.

 

According to management discussion and analysis accompanying the release of the results, the increases were mainly attributable to revenue from Pastel Glove &ndash as the acquisition had been completed in October 2021. But the company did not disclose whether Pastel Glove&rsquo s own revenue and profits are growing year on year.

 

Pastel Glove&rsquo s co-founder Law Siau Woei provided a profit guarantee of S$23.4 million over three years, from 2022 to 2024, as part of the acquisition agreement dated Aug 5, 2021.

 

If Pastel Glove meets this profit guarantee, the glove business could be a significant contributor to Enviro-Hub&rsquo s total earnings.

 

In 2021, Enviro-Hub generated S$6.1 million in operating profit from the trading, recycling and refining of e-waste and S$6 million from property investments and management. Its construction business turned in operating losses of S$1.1 million. The group&rsquo s total reportable profit before tax and finance costs stood at S$11.3 million.

 

Gloves &ndash a cyclical industry

 

The Covid-19 pandemic was an exceptional one, but Pastel Glove co-founder Choo Kuan Ping said the surge and collapse in demand for gloves is something he has seen before.

 

In the 20-plus years spent in this industry, Choo has seen similar cycles every three to five years as healthcare systems prepare to fight potential pandemics.

 

Over the longer term, he expects demand for gloves to continue rising. And he is preparing Pastel Glove accordingly. The company is looking to open two more production lines for a maximum capacity of 1.42 billion gloves when the market stabilises next year. 

 

Choo&rsquo s plan is ambitious, given that Pastel Glove&rsquo s current utilisation rate stands at 40 per cent. The company can produce between 800 million and a billion gloves each year across its four production lines in Ipoh, Perak.

 

But he believes Pastel Glove will be able to weather the storm better than its competitors because the company&rsquo s focus has been on natural rubber latex gloves rather than nitrile latex gloves.

 

&ldquo European and American clients have been worried about potential allergic reactions, so they tried to avoid natural rubber latex gloves. During the pandemic, some hospitals also acted on instructions not to purchase such gloves, so the price of nitrile gloves jumped,&rdquo he said in Mandarin.

 

&ldquo In reality, the usage of latex gloves never fell because it has been difficult to eliminate&hellip they can mould to your hands better like a second skin, unlike nitrile gloves which have a more baggy feel.&rdquo

 

He added that while Chinese glove manufacturers have produced large quantities of nitrile latex gloves, they have not been able to successfully disrupt the natural rubber glove market. 

 

Law said natural rubber is cheaper in Malaysia, as Malaysia is among the world&rsquo s largest rubber producers. In addition, he said China&rsquo s climate is not as suited to the compounding of natural latex.

 

Latex compounding involves the blending of concentrated natural rubber latex with chemicals, to alter the rubber&rsquo s attributes. Law said factors such as humidity and temperature can greatly affect the quality of latex compounded. 

 

Creating a different pharmacy experience

 

Last year, Pastel Glove also entered into a joint venture with one of its co-founders to expand into the operation of pharmacies. Pastel Care is 40 per cent owned by Pastel Glove and 60 per cent owned by Law. The joint venture&rsquo s R Pharmacy opened its first branch in Klang Valley on Apr 16. 

 

Chief executive officer and executive director of R Pharmacy Adrian Toh said the pharmacy had opened seven stores as of Oct 2, and is on track to open 18 more by April next year.

 

While he acknowledged the market is crowded, with more than 1,000 other pharmacy brands in Malaysia, he said R Pharmacy will focus its attention on neighbourhoods with more than 6,000 people and no other competitors.

 

R Pharmacy also hopes to differentiate itself with additional services typically offered at clinics.

 

For instance, customers can get instant glucose tests at RM3 (S$0.90) each and uric acid blood tests for RM5. There are private consultation rooms for customers to speak to pharmacists. And same-day deliveries can be arranged for customers who are not able to leave home.

 

Toh compared R Pharmacy&rsquo s strategy to that of steamboat chain Haidilao, where diners can get their nails painted while waiting for a table.

 

&ldquo These are a lot of the things that you don&rsquo t see in pharmacies any more because it has become (more) transactional,&rdquo he said, adding that pharmacists&rsquo skills have not been fully utilised by the other chains.

 

&ldquo You start seeing that big pharmacies are selling a lot of toys&hellip to just make up the bottom line. Imagine the pharmacist &ndash after practising for so many years, and they&rsquo re just there to sell toys? That&rsquo s not what we want to do,&rdquo he said.

 

In a report last month, UOB Kay Hian analyst Llelleythan Tan noted the potential for the pharmacy business to achieve scale and eventually generate positive cash flow for Enviro-Hub. The company currently generates negative cash flow from operating activities.

 

R Pharmacy has an online store on the Lazada e-commerce platform, and its best-selling product is adult milk powder. &ldquo Given the nature of the product, this could generate a recurring stream of income for Enviro-Hub,&rdquo Tan said.

 

He also sees potential for the value of R Pharmacy to grow, should it achieve its target of 90 pharmacies by 2024. In July, Bloomberg reported that Malaysia-listed convenience store operator 7-Eleven Malaysia Holdings was looking to exit its investment in Caring Pharmacy. The latter has over 120 pharmacies across the country and is reportedly valued at US$400 million.