Results

• 1HFY08/15 revenue of RM1.14bn (+1.6% yoy) was translated into core net profit of RM112.8m (+6.9% yoy).

• Although revenue came in below expectations, core net profit turned out in line, accounting for 47.8% and 57.1% of HLIB and consensus full year estimates, respectively.

• One-off adjustment related to forex arising from forward contracts in 1Q15, 2Q14 and 2Q15 were RM1.6m, -RM7.0m and -RM6.4m, respectively.

Deviations

• Broadly in line.

Dividends

• None (2Q15: None). Normally declared in third quarter.

Highlights

• 1H15 revenue increase +1.6% yoy on the back of +4.5% improvement in sales volume, particularly from latex powdered (+10% yoy), nitrile (+9%) and surgical (+20%), but partly offset by lower ASP.

• Other than favourable currency and raw material prices, 1H15 core net profit grow by +6.9% yoy underpinned by (1) higher sales volume; (2) improved margin of latex gloves; (3) newer and more efficient machineries; (4) on-going internal improvement in quality, efficiency and cost control; and (5) turnaround of China operation (1H15 gain of RM3m).

• There is an increase in contribution from nitrile glove segment (2Q14: 23% vs 2Q15: 25%) signalling increase demand from emerging markets as well as demand from traditional customers switching from latex to nitrile. In view of this, F30 in Klang will be fully utilized for nitrile with capacity to produce 4.4bn pcs pa, coming on stream in Sept 2016.

• Sales volume by geographical segment shows that volume from Asia has improved from 14% in 2Q14 to 18% during the quarter, largely attributable to increasing orders from Japanese customers.

• Raw material prices continue to trend down with latex prices declining to RM3.63/kg (-25.3% qoq) and nitrile prices to USD1.03/kg (-5.5% qoq).

• Management shared that part of their KPI is to execute at least one acquisition every year. For FY15, they are aiming for M&A in businesses that are related to ceramic formers or packaging materials or existing domestic glove factory.

Risks

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

Forecasts

• We factor in higher USD rate, as a result, EPS increased between 1-13% for FY15-FY17

Rating

HOLD , TP: RM5.42

Positives

• Gradual shift to nitrile gloves, China’s operationsturned around, cost reduction through product line automation and SAP ERP system.

Negatives

• Will experience lower net profit margins whencompared 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

We raise our TP from RM4.62 to RM5.42 as we lift our targeted PE from 13.5x to 15.4x, pegged to 3-year historical average P/E (Figure #6) vs. 1SD below previously, given the positive impact from stronger USD. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 19 Mar 2015