Results

• FY12/15 revenue of RM1,635.9m (+25.9% yoy) was translated into adjusted PATAMI of RM163.3m (+25.5% yoy), below HLIB and consensus expectations, accounting for 76.8% and 79.3% of HLIB and consensus full year estimates, respectively, after excluding FOREX gain amounted to RM17.4m.

Deviations

• Decline in ASPs impacting margins.

Dividends

• None.

Highlights

• 4Q15’s sustained sequential performance el evated FY15’s revenue by 25.7% yoy, with major contribution coming from glove division (+28.7% yoy) – thanks to higher sales volume (26% year-to-date), better product mix and greater operational efficiency.

• We understand that ASP has dropped by -9%, -17% and - 11% yoy in powdered NR, powdered free NR and NBR, respectively.

• Sales mixed have been trending towards nitrile with the ratio of latex to nitrile of 30:70 in FY15 vs. 43:57 in FY14.

• Top-line was also buoyed by strong improvement from clean room division (+48.7% yoy), albeit its small cont ribution at 4% of total revenue.

• Technical rubber division reported an increase in PBT by 20.6% yoy for FY15 despite -1.1% drop in revenue.

• Average utilization rate remained healthy above 80%-82% level.

• Management guided for no new production capacity in FY16. However, additional capacity of 18-20bn pcs is expected over the next 4 years, via 4 phases with 1 plant each (4.5bn pcs per plant). Plant 1 with 4bn pcs is expected to contribute in 3QFY17.

Risks

• Surge in nitrile and latex prices.
• Spike in chemical prices.
• Depreciation of USD vs. MYR.

Forecasts

• We lower our production capacity assumption by 7%-8% in FY16-17 as per latest guidance.
• We note that the strong USD catalyst may diminish in 2H16 as ringgit is poised to maintain its strength given resilient economic fundamental. We trim our ringgit assumption to RM3.80/US$ in our FY17 and FY18 forecasts (vs. RM4.00/US$ previously).

Rating

HOLD , TP: RM7.06

Positives

• Management team with extensive engineering experience, continuous investment in R&D/automation.

Negatives

• Exposure to possible supply glut as a result of over aggressive expansion by all glove players.

Valuation

Maintain HOLD with a lower TP of RM7.06 (previously RM7.81) post earnings forecast adjustments, based on an unchanged P/E multiple of 16.6x CY17 EPS, +1SD above 5- year historical average P/E.

Source: Hong Leong Investment Bank Research - 24 Feb 2016