Period     1QFY13

Actual vs. Expectations   1QFY13 net profit of RM31.8m came in within expectations, accounting for 22-23% of ours and the consensus full-year net profit forecasts.

Dividends    No dividend was declared for 1QFY13.  

Key Results Highlights    QoQ, the revenue came in flat at RM320m as the volume sales was offset by the lower average selling price (ASP) of nitrile gloves due to competitive pressure. However, the PBT fell 13% as it was hit by the higher minimum wage policy, where the higher cost was not able to be fully passed on to its customers. As a result, the PBT margin fell 1.7%ppts to 11.5% from 13.1% in 4QFY12. Nonetheless, net profit actually rose slightly to RM31.8m (+1.0%) due to a lower effective tax rate mainly owing to reinvestment allowance being claimed by certain subsidiary companies. Typically, customers are given a time of two to three months before new ASPs take effect. As such, we are not overly concerned of further margin erosions as an estimated 3-5% increase in the ASPs, which was informed to customers in Jan 2012, will take effect from the second quarter onwards. 

YoY, 1QFY13 revenue rose 29% on the back of new capacity from the new and refurbished lines from Lot 6070. Pre-tax profit rose 19.7% due to the stable input raw material cost, which more than offset the slight margin erosion arising from the minimum wage policy.

Outlook     On Lot 6070, the decommissioning of the old lines with 12 new lines or 1.43b pieces of gloves (converting from latex-based gloves to nitrile) is now commercially ready. For illustrative purposes, based on a net profit margin of 10%, an ASP of USD28/1000 pieces and 1.43b pieces, this will generate a total net profit of RM12m or 8% of FY13 net profit. The other two plants namely Lot 6059 and Lot 6058 are expected to be on track to commission commercial production gradually starting from Jun 2013. Lot 6059 and 6058 will have 24 and 16 production lines producing 3.2b and 2.2b pieces of nitrile gloves respectively. This will bring its total nitrile production capacity from 6.9b to 12.3b pieces p.a. or 52% of the total installed capacity. The first line is expected to commence from June 2013. 

Change to Forecasts     No change to our estimates. 

Rating    Maintain OUTPERFORM

Valuation     Our TP is RM2.39 based on 10.2x FY14E EPS. The targeted PER is at the +0.5SD level above the 5-year historical average. 

Risks    Higher latex prices and a stronger ringgit.

Source: Kenanga