Results

• Within Expectations : 1H18 PATAMI came in at RM214.5m (+37.1% yoy), accounting for 49.0% of ours and 49.9% of consensus estimates.

Dividends

• No dividends were declared during the quarter under review.

Highlights

• YTD: Revenue grew to RM1896.6m (+15.9%) yoy due to higher sales volumes (+19%), higher utilization rates (c. 87.5%) and higher ASP (c.+3%). Consequently PATAMI grew to RM214.5m (+37.1%) yoy partially boosted by a lower effective tax rate (1H18: 12% vs. 1H17: 19%). YTD EBITDA margin expanded by 1.4ppts aided by lower raw material prices yoy partially offset by higher operating costs.

• YoY: Revenue growth of RM958.4m (+12.6%) was largely due to higher volumes sold (+21%) on the back of an enlarged capacity and stronger demand from both developed and developing markets and a higher ASP (+4%). EBITDA margin expanded by 1.6 ppts yoy on the back of higher utilization rates amidst robust global demand and lower raw material prices (NR: -26.1%, Nitrile -1.9%). PATAMI grew 31.4% yoy to RM108.9m.

• QoQ: Revenue grew 2.2% qoq on the back of higher volume (c.+3%) and ASP (+c.4% qoq). Natural rubber gloves accounted for the bulk of the volume growth in 2Q18. EBITDA margin expanded by 0.9 ppts to 14.9% on higher utilization rates during the quarter (c.90%) and lower raw material prices (NR: -12%, Nitrile: +5%). Consequently, PATAMI grew 3.3% in tandem with top line velocity.

• The greater global demand for gloves remains the driving force behind the increase in utilization rates. YTD the group saw a 60% boost in sales to Asia (-ex Japan) and 40% growth in sales to Eastern Europe, namely driven by greater healthcare awareness and increasing hygiene standards. 1H18 utilization rates are hovering c.87.5% vs. 80% in FY17. We continue to expect utilization rates to maintain at these levels for FY18.

• The group’s expansion plans, culminating with an additional 7.8bn pieces per annum remain on track albeit pushed forward by c. 1 month with F31 expected to be operational by June 2018 (previous guidance May) and F32 by early 2019 (previously December 2018).

Risks

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

Forecasts

• Unchanged.

Rating

• HOLD , TP: RM9.95 ↔

• 1 in 3 surgical gloves globally will come from TG upon completion of the acquisition of Aspion which marks the group’s intent to dominate a high margin niche segment, which is expected to propel TG’s earnings. Nonetheless, we downgrade to a HOLD given the run in share price which currently sits above 2SD above historical mean.

Valuation

• Maintain TP of RM9.95 . Our TP is based on a PE multiple to 25x or 2SD above historical mean pegged to CY19 earnings. (see Figure#5).

Source: Hong Leong Investment Bank Research - 16 Mar 2018