Results

• Inline: 2QFY17 PATAMI improved by 27% QoQ, bringing 1HFY17 profit to RM127m, accounting for 48% and 46% of our and consensus full year estimates, respectively.

Deviations

• We expect earnings in 3QFY17 to be sustained at RM70m level following the upward revision in ASP and higher utilisation rate.

Dividends

• Declared interim dividend of 2.0 sen/share, bringing 1HFY17 to 4.0 sen/share.

Highlights

• YoY: 2QFY17 earnings increased by 18% YoY due to higher sales volume (+29%) but offset partly by lower ASP (-17%) and higher production cost.

• QoQ: Revenue rebounded by 9% as utilisation improved from 82% to 88% on the back of growing demand. PATAMI also improved by 27% mainly due to margin expansion on higher utilisation rate. We understand ASP was largely unchanged QoQ.

• Rising raw material prices… Price of nitrile butadiene increased by 10% to more than USD1/kg and average latex price had climbed up recently from RM4.2/kg to >RM5/kg. Despite this, we opine that the company should be able to pass through the rising cost to customers with 1-2 months lag impact.

• Expanding capacity… Production capacity is estimated to increase to 22.7bn pieces (+17% YoY) by end of FY17 with sales target of 20bn pieces. Plant 3 and 4 have commenced in 3Q16.

• Overcapacity for nitrile in 2H17… Given most of the glove makers are focusing on expanding nitrile segment, we expect oversupply for nitrile glove to occur in 2H17 which would put pressure on the ASP.

• Weakening of Ringgit… Currently, we have conservatively factored in RM4.06/US$ and RM4.00/US$ in our FY17 and FY18 assumptions even though ringgit has recently weakened to RM4.20/US$.

Risks

• Further reduction in ASP amid steep competition.

• Sharp surge in nitrile and latex prices.

• Depreciation of USD vs. MYR.

Forecasts

• Unchanged.

Rating

HOLD ↔, TP: RM4.06 ↔

• Despite >10% downside from our target price, we maintain our HOLD rating in view of the company would potentially benefit from strong USD on higher likelihood of Fed rate hike.

Valuation

• Maintain HOLD with unchanged TP of RM4.06 based on an unchanged P/E multiple of 22x CY17 EPS.

Source: Hong Leong Investment Bank Research - 9 Nov 2016