Results

1HFY14 net profit of RM94.2m (-14.6% yoy) came in below expectations, accounting for 41.8% and 41.9% of HLIB and consensus full year estimates respectively.

One-off adjustment related to forex arising from forward contracts in 2QFY13, 1QFY14 and 2QFY14 were RM14.9m, -RM6.7m and -RM7.0m respectively.

Deviations

Lower-than-expected gross margins as ASP was under pressure amid steep competition coupled with declining sales volume.

Dividends

None, but targeting 50% payout ratio.

Highlights

Negative revenue growth in 2QFY14 (-4.9% yoy, -4.5% qoq) was mainly due to lower ASP as well as declining sales volume (-12% qoq).

A fall in latex prices from RM5.77/kg to RM4.86/kg (-15.8% yoy) and nitrile prices from USD1.22/kg to USD1.09/kg (- 10.7%) immobilised cost pass-through mechanism, thereby causing margin pressure. This was made worse by increased price competition.

Expansion plan of new factory in Klang (F29) was delayed from August to Dec 2014 as a result of oversupply in the nitrile glove market. There was a temporary shutdown in the production lines for automation upgrading purposes.

Losses from China’s operations were contained at RM5.4m (1QFY14: RM5.2m). Expecting breakeven in coming quarters as Xinghua (F15) operations are consolidated in order to cut losses.

CAPEX guidance: Anticipates 50% of total CAPEX to be spent on factory expansion, 12% on upstream plantation activities in Indonesia and 38% on Top Glove Tower project.

The company foresees a very challenging and competitive business environment, with competition mainly from Malaysian counterparts.

Risks

• Further reduction in ASP amid steep competition.
• Higher latex prices during wintering season.
• Weaker USD against the MYR.

Forecasts

Updated model based on deviations mentioned above. As a result, FY14 and FY15 EPS were trimmed by 13.4% and 18.5% respectively.

Rating

HOLD, TP: RM5.31

Positives - Gradual shift to nitrile gloves, expecting breakeven in China’s operations, cost reduction through product line automation and SAP ERP system

Negatives - Will experience lower net profit margins when compared to peers due to low exposure in nitrile latex gloves and PF NR gloves. About 46% of output in low margin powdered NR glove.

Valuation

Maintain HOLD even though we have cut our fair value by 12.8% from RM6.09 to RM5.31.

We pegged our TP to a slightly lower multiple of 15.7x CY15 based on 5-year historical average P/E (see Figure 5) compared to previous’ 16.0x.

Source: Hong Leong Investment Bank Research - 21 Mar 2014