Results

• Below Expectation: 2QFY17 core PATAMI fell by 30% YoY to RM12.5m, bringing 1HFY17 to RM21.7m, accounting for 29% and 31% of HLIB and consensus full year estimates.

Deviations

• Mainly due to higher marketing and distribution expenses related to the expansion of the OBM segment.

Highlights

• YoY : Revenue was flat YoY but core PATAMI fell by 30% due to the full effect of the reduction in ASP coupled with increase in latex price.

• QoQ : Revenue improved by 22% mainly due to recovery in tender segment and the expansion of OBM segment. Core PATAMI (excluding one off RM2.5m expenses related to listing and registration of products) rose 37% due to shift towards a higher margin product mix in the commercial and OBM segments. OBM segment as percentage of total revenue grew from 13% to 15% QoQ ahead of company’s target to reach 20% by 2020.

• Utilisation rate remained low at 60% level but is expected to improve going forward due to recovery in tender segment. ASP for tender market had bottomed up and we should see increasing in purchase order with more significant improvement to be seen in 2H17.

• As the company continues its effort in expanding into OBM segment, we expect marketing and admin expenses to stay high for next few quarters. In the long term, we continue to like the company’s effort in growing its OBM business through organic and inorganic growth. GP margin for OBM segment is much higher at above 40% as compared to tender segment at 20% and commercial at 30%.

• Average latex price had climbed up recently from RM6.5/kg to around RM8/kg. We understand that latex comprises 20% of total of production cost and company had hedge its position until Apr17. We opine that higher USD should help to mitigate the impact of rising raw material prices. Currently, we have only factored in RM4.30/US$ in our FY17 and FY18 assumptions as compared to current rate of RM4.45/US$.

Risks

• Surge in raw material prices, forex risks, revision on foreign labour policy, and successful invention of HIV/AIDS cure.

Forecasts

• FY17, FY18 and FY19 earnings forecasts are reduced by 31%, 21% and 5% respectively after we factor in higher marketing cost and raw material prices.

Rating

HOLD ↔

• Valuation remains rich at this level. However, we are long term positive on its ambition on OBM segment to capture the huge upside in margin expansion.

Valuation

• We maintain our HOLD recommendation with our TP lowered from RM2.62 to RM2.29 by pegging to unchanged P/E multiple of 24x of CY18 EPS post earnings downgrade

Source: Hong Leong Investment Bank Research - 27 Feb 2017