Results

• Broadly inline with expectation. 1QFY16 PATAMI increased 13% YoY but dropped 7% QoQ to RM51m, accounting for 22% of HLIB and consensus full year estimates.

Deviations

• Historically, 1Q was seasonally lower and accounted for 22- 23% of full year earnings. We are expecting stronger 2H.

Dividends

• None.

Highlights

• YoY, revenue was up 12% driven by increased in sales volume (gloves, +10%, technical rubber products, +18% and clean room, +33%) and stronger USD but partly offset by lower average selling price.

• Given the intensi fied competition, ASPs were reduced by 26%, 16% and 13% yoy in powdered NR, powdered free NR and NBR respectively. We understand the sharper drop in ASP of NR was partly due to competition from nitrile glove with lower price.

• EBITDA margin was reduced slightly from 21.8% to 20.5% QoQ mainly due to higher production cost (price increase in raw materials and natural gas) amid increased competition. Going forward, management will emphasize on its patented accelerator free nitrile glove and other unique type of gloves which command better margin.

• Quantity of gloves sold increased by 8% YoY and 1.7% QoQ. Utilisation rate is close to full capacity. The construction of new plant at Jalan Meru with 3bn pcs capacity will be competed in 3QFY17.

• However, the completion of Phase 1 (4.5bn pcs) at Bestari Jaya land will be deferred from 3QFY17 to 1QFY18. No change to our earnings as we have only factored contribution in FY18.

Risks

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

Forecasts

• We had earlier factored in average ringgit assumption of RM3.80/US$ in our FY17 and FY18 forecasts. As such, any weakening bias in Ringgit against USD will provide upside risk to our forecast.

Rating

HOLD , TP: RM6.73

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 unchanged TP of RM6.73 based on an unchanged P/E multiple of 15.9x CY17 EPS, +0.5SD above 5-year historical average P/E.

Source: Hong Leong Investment Bank Research - 25 May 2016