Period    1HFY13

 The reported 1HFY13 net profit of RM111.9m accounted for 50% and 49% of our full year forecast and the consensus estimates respectively.

Dividends   The company has declared a first single tier interim dividend of 3.5 sen per share. The entitlement date has been fixed on 23 November 2012. 

 QoQ, the revenue increased 3% but net profit grew at a faster rate of 9.8% due to the improvement in the net margin by 150bps. We understand that the improved profitability was due mainly to better operation efficiency i.e. improved line speeds as well as cost-containment measures alongside the lower raw material cost. As for the top line, while the growth rate seems marginal, it is somewhat impressive against the declining trend in ASP. The lower ASP (-0.9% for nitrile and -9.4% for latex gloves QoQ) is due to the substantial easing of nitrile and latex input costs as well as price competition. During the quarter, the utilisation rate further improved to 90.7% from 89.5% (vs. our expectation of 85%) despite the increase in capacity by two production lines or 285m pieces glove p.a. during the quarter.

 YoY, the revenue and net profit jumped 11% and 27%, respectively due to the abovementioned reasons (nitrile and latex dropped >20% and >30% YoY respectively) and also the weaker ringgit (2QFY13: RM3.12 vs. 2QFY12: RM3.02). 

Outlook   With the completion and commencement of Plant 6, there will be some 680m pieces of additional glove capacity, lifting the total capacity to more than 10b pieces p.a.. This should further boost its revenue  in 2HFY13. 

 Coupled with the improved efficiency and the continued downtrend in latex (<RM6.00/kg currently) and nitrile prices, we reckon the net margin should be able to be supported/hovering around the 20% levels.

 We have fine-tuned our earnings estimates after adjusting our assumptions on the utilisation rates, ASPs and profit margins. Our FY13 and FY14 net earnings have been revised to RM229.2m and RM256.5m respectively from RM 225.8m and 245.3m, representing marginal adjustments of 2% and 5% respectively. 

Rating  Maintaining MARKET PERFORM  as the stock offers a <10% total return even after our Target Price revision. 

Valuation    In line with our earnings revision and the revived investment sentiment in the sector, we have revised up our Target Price to RM5.12 from RM4.65, implying 15x CY13 PER, which is the +1 standard deviation above the 3-year average PER and also in line with the valuation of FBM KLCI.  

Risks   (i) Lower utilisation rate (ii) squeeze in margin & (iii) fluctuation in ringgit and commodity prices.

Source: Kenanga