Results

• Below Expectations: 9M17 PATAMI of RM25m (-54% yoy) was below expectations, accounting for 48% and 47% of HLIB and consensus full year estimates.

Deviations

• The deviations in the results are mainly due to higher marketing and distribution expenses related to the expansion of the OBM segment and continued depressed ASP from the tender market.

Highlights

• YTD: Revenue grew 3.4% yoy despite the tougher tender market and compressed ASP environment. This is reflexive of the strides made in the OBM segment (double digit growth yoy). Gross margins were within the comfort levels of 30- 33%. Nonetheless, PATAMI declined 54% yoy on continued investment in the OBM segment.
• Yoy: Revenue grew 4.5% yoy but PATAMI fell by 28.3% due to the depressed ASP environment coupled with steep increase in latex prices yoy.
• Qoq: Revenue declined by 5.5% mainly due to pricing competition in the tender segment and lower contribution from the medical segment qoq. Subsequently PATAMI declined 31.2%.
• Utilisation rate remained at the 60%-65% levels for the period under review. ASP for tender market is still to recover as the segment remains extremely price competitive.
• There was a growth in orders from the African tender market (+4ppts qoq) partially offset by a decline in orders from the Americas (-4ppts qoq).
• The group is making a push into the UK and US consumer market as the company continues its effort in expanding into OBM segment; as such we continue to expect marketing and admin expenses to grow in tandem with the size of their commercial campaigns.
• We opine that strength in USD should help to mitigate the impact of rising raw material prices. Latex price has hovered around RM6.5/kg from around RM8/kg at the beginning of the year. We maintain a RM4.30/US$ in our FY17, FY18 and FY19 assumptions.

Risks

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

Forecasts

• We reduce our FY17/18/19 earnings by 28%/10%/22% on the expectation of continued competitive ASP environment for the tender market and continuous targeted investments in the OBM segment.

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 a lower TP of RM1.97 (from RM2.29) pegged to unchanged P/E multiple of 24x of CY18 EPS post earnings revision.

Source: Hong Leong Investment Bank Research - 31 May 2017