Highlights 

We  left  the  fund  managers,  analysts  and  media  briefing feeling  neutral  due to the lack of catalyst (s).

Nitrile  segment:  FY14  product mix has shown an increase in  the  nitrile  glove  contribution  to  total  sales  volume  (see Figure #1).  This is  in line with  the target towards a balanced product  mix  between  latex   and  nitrile  gloves,  backed  by Malaysia’s 1H14  glove  exports mix of 50:50  (see Figure #2).

R&D:  A new R&D team is set up with 45 researchers (PhD, master’s degree holders, etc.) currently , targeting  a team of 100  researchers.  The  team  is  working  towards   bringing  the achievement  in  latex   gloves  to  another  level  (i.e.  thinner gloves,  better  chemical  compound).  If  this  initiative  turns successful, it will be a cutting edge in future, as  the industry is   focusing  more  on the R&D in nitrile gloves.

Budget  2015:  Benefits  from  the  automation  capital allowance  of  200%  on  the  first  RM4m  expenditure,  albeit  a small  amount  relative  to  their  huge  automation  expenditure which can go  up to  RM80m.  T hey are also  eligible to claim tax incentive  for scholarships.

Ebola:  The deadly disease turned out to be a false catalyst. Despite  an  increase  in  demand  received  from  customers (suppliers of WHO,  UNESCO, etc.), the contribution to total volume  is insignificant due to the large base.

Upstream  venture:  The initial venture into rubber plantation in  Indonesia  is  likely  to  be  retracted  due  to  the  challenging environment.  Company  is  looking  at  the  possibilities  of disposal  of  the  land  or  a  joint  venture  with  loc al  partner, which we  believe  the odds is with the former.

Strategies moving forward: (1) Focusing on human capital management;  (2)  Improving  efficiency  and  effectiveness  of technology; and (3) Investing  in R&D and IT.

Capex  and  M&A:  Circa  RM200m  which  includes  the possibility of  looking at an inorganic growth route. They may be  targeting  an  acquisition  of  local  private  companies  or international  players, particularly Thailand.

Given  the  mixed  bag  of  positive  and  negative  insights,  we note  that  the  lack  of  c atalyst(s)  and  near  term  growth  will likely  be  muted.  Hence,  we  are  maintaining  our  forecasts and recommendation  on the counter.

Risks

• Further  reduction in ASP amid steep competition.
• Surge in nitrile and latex prices.
• Weaker USD  against MYR.

Forecasts

• Unchanged.

Rating

HOLD, TP: RM4.56

• Positives  -  Gradual  shift  to  nitrile  gloves,  potentially profitable 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  47%  of  output  in  low  margin powdered  NR glove.

Valuation

• Maintain HOLD  on the back of unchanged  TP of RM4.56.

Our valuation was pegged to an unchanged multiple of 13.5x CY15  EPS  based  on  1SD  below  3-year  historical  average P/E

Source: Hong Leong Investment Bank Research - 17 Oct 2014