Results

• Inline: 3QFY17 PATAMI fell by 7% QoQ, bringing 9MFY17 profit to RM194m, accounting for 73% and 69% of our and consensus full year estimates, respectively.

Deviations

• We expect earnings in 4QFY17 to improve as 3QFY17 results were weaker QoQ mainly due to unrealised foreign loss arising from revaluation of USD denominated loan and losses from forward contracts.

Dividends

• Declared interim dividend of 2.0 sen/share, bringing 9MFY17 to 6.0 sen/share.

Highlights

• YoY: 3QFY17 revenue surged by 15% due to increase in sales volume arising from higher utilisation rate (from 81% to 86%) and stronger USD. However, earnings fell by 9% YoY due to unrealised foreign loss arising from revaluation of USD denominated loan and losses from forward contracts.

• QoQ: Revenue improved by 4.4% mainly due to strengthening of USD and higher ASP (+6%) but offset slightly by lower utilisation (fell slightly from 88% to 86%). PATAMI fell by 7% mainly due to same reason above.

• Rising raw material prices… Price of nitrile butadiene had surged by 35% to circa USD1.4/kg and average latex price had climbed up recently from RM6.5/kg to >RM8/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… Plant 3 and 4 have commenced operation in Oct 16. We understand total 4 lines have been in operation for Plant 3 with 1 new line installed per month. Both Plant 3 and 4 will be fully commissioned by mid of 2018 and we expect total capacity to increase from 24bn by end of CY16 to 33bn in CY18.

• Buffer from the strong USD… Currently, we have conservatively factored in RM4.30/US$ in our FY17 and FY18 assumptions as compared to current rate of RM4.45/US$. We opine this will help to mitigate the impact of rising raw material prices.

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: RM5.09 ↔

• Leader in nitrile glove market with highest profitability. However, valuation is stretched and is trading at 21x CY18 P/E versus peer at 16x.

Valuation

• Maintain HOLD with unchanged TP of RM5.09 based on an unchanged P/E multiple of 22x CY18 EPS.

Source: Hong Leong Investment Bank Research - 15 Feb 2017