Results

• Below expectation. 1HFY16 PATAMI was flat YoY at RM92m, accounting for 40% of HLIB and consensus full year estimates.

Deviations

• Mainly due to loss of production output caused by scheduled revamps work on older lines.

Dividends

• None.

Highlights

• YoY, revenue surged by 4.7% on the back of higher volume sold (+2.3%) and strong USD offset by lower ASPs. However, PATAMI fell by 14% due to higher production costs and intensified price competition.

• QoQ, revenue dropped by 2.1% and PATAMI fell by 20%. This is mainly attributed by i) loss of production output due to revamp works on the older lines, and ii) rising production cost (latex price surged by 26% QoQ). The revamps works should result in higher productivity as this is expected to increase older line output by 17%. We understand the revamps works have been completed and production should have normalised since Aug 16.

• Given the intensi fied competition, ASPs were reduced by 7.5%, 8.1% and 9% yoy in powdered NR, powdered free NR and NBR respectively. However, in term of QoQ, we see improvement in ASP especially NR gloves with a 10% increase.

• Going forward, management will emphasize on its patented accelerator free nitrile glove and other unique type of gloves which command better margin. It will be launching its patented accelerator free nitrile gloves on 1 Sept 16. We understand this new product will reduce allergic reaction and offer better durability. This should help to protect margin amidst intensed pricing competition.

• With the new plants in Jalan Meru and Bestari, capacity is expected to increase by 14% and 18% in CY17 and CY18 respectively. However, the expansion will be progressive to cater for new products.

Risks

• Surge in nitrile and latex prices, spike in chemical prices, and depreciation of USD vs. MYR.

Forecasts

• FY16 and FY17 earnings forecasts are reduced by 8% and 7% respectively after factoring in lower margin and loss of production output due to temporary revamp works.

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 TP lowered from RM6.53 to RM6.07 based on an unchanged P/E multiple of 15.9x CY17 EPS.

Source: Hong Leong Investment Bank Research - 24 Aug 2016