Period

2Q15/1H15

Actual vs. Expectations

1H15 net profit of RM49.7m (-6.8% yoy) came in below expectations at around 42-43% of our, and consensus’, full-year forecasts. The negative variance from our forecast was due to lower-than-expected sales volume and margins. This quarter marks the sixth successive quarterly results missing expectations.

Dividends

A single-tier DPS of 2.0 sen was declared in 1H15. Key Result

Highlights

QoQ, 2Q15 revenue rose by 2.8% on the back of a strengthening USD. Coupled with the implementation of some cost controls, 2Q15 PBT increased by 4.6%. This brings. 2Q15 PAT to RM24.7m (-0.8% QoQ) due to higher effective tax rate.

YoY, 1H15 revenue and net profit fell by 4% and 7%, respectively, largely due to lower ASPs on the back of a flattish volume growth as some production lines were ramp up slower-than-expected. We believe start-up costs were incurred as the Group continued to install and test-run brand new lines at its two new plants in Meru, Klang. These start-up costs will be absorbed once all the lines have been installed and are running at optimum levels.

Outlook

Growth going forward is expected to be driven by two new plants and we understand that the building structures for Plant #10 and Plant #11 i.e. Lot 6059 and 6058 in Meru, Klang are up and the first batch of lines has been commissioned. Lot 6059 and 6058 will have 24 and 16 production lines producing 3.2b and 2.2b pieces of nitrile gloves p.a., respectively, bringing the total nitrile production capacity from 6.9b (including the 1.4bn in Lot 6070) to 12.3b pieces p.a. or 52% of the total installed capacity.

Change to Forecasts

We are downgrading our FY15E and FY16E net profits by 7%, taking into account lower ASPs and margins.

Rating & Valuation

Downgrade from OUTPERFORM to MARKET PERFORM. The share price has appreciated 33% YTD. Coupled with constantly missing earnings expectation as well as slower-thanexpected ramp up at the new plant, we expected earnings to be pedestrian over the next subsequent quarters. Our TP is RM2.38 based on FY16E revised EPS.

Risks

Slower-than-expected commissioning of new plants.

Source: Kenanga Research - 27 Aug 2015