Results

• Above Expectations : 1Q18 PATAMI came in at RM105.4m (+44.1% yoy, +7.1% qoq), accounting for 27.9% of ours and 26.8% of consensus estimates.

Dividends

• No dividends were declared during the quarter under review.

Highlights

• YoY: Record revenue growth of RM981m (+19.4%) was largely due to higher volumes sold (+17%) on the back of an enlarged capacity and stronger demand from both developed and developing markets and a higher ASP (+2%). PATAMI grew 44.1% yoy to RM105.4m partially boosted by a lower effective tax rate (13% vs. 18%). EBITDA margins expanded by 1.1 ppts yoy on the back of higher utilization rates amidst robust global demand and greater efficiencies in the manufacturing process.

• QoQ: Revenue grew 4.0% qoq on the back of a higher ASP (c.+2%) and volumes (+c.8% qoq), nitrile gloves accounted for the bulk of the volume growth. EBITDA margin expanded by 1.3 ppts to 14.9% on higher utilization rates during the quarter. Consequently, PATAMI grew 12.5%.

• With the revision in ASP (+2% qoq/yoy) and higher utilization rates, we expect EBITDA margin to range between the 15-15.5% levels in FY18.

• The earnings boon has been catalysed by the vinyl glove shortage in China; however greater global demand for gloves is the main driver in the increase in utilization rates. 1Q18 utilization rates are at c.85-86% vs. 80% in FY17. We expect utilization rates to maintain at these levels for FY18.

• The groups expansion plans remain on track with F31 (March 2018) and F32 (December 2018) with an added capacity of 7.8bn pieces per annum expected to be operational as scheduled. We expect the conclusion of the Aspion acquisition to take place by January.

Risks

• Reduction in ASP amid steep competition; continued surge in nitrile and latex prices; and Weaker USD against MYR.

Forecasts

• We adjust our earnings forecast to accounts for a higher utilization rate (80% to 86%) for our FY18-19 forecast. Subsequently, our FY 18-19 EPS increases by 8%-9%.

Rating

BUY , TP: RM8.47

• We upgrade to a BUY in view of the stronger than expected results and the pending conclusion of the Aspion deal which is expected to support the share price.

Valuation

• Post earnings revaluation our TP increases to RM8.47 from RM6.33. We are changing our PE multiple to 25x or 2SD above historical mean (from 20x or 1SD above historical mean) on the back of robust global demand as the glove sector undergoes an upcycle and earnings continue to surprise on the upside (see Figure#5).

Source: Hong Leong Investment Bank Research - 20 Dec 2017