Period

3Q16/9M16

Actual vs. Expectations

9M16 net profit of RM88m (+8% yoy) came in above expectations at c.90% of our full-year forecasts (note that change in financial year-end from Dec to June, as such results would be 18 months to FY Jun 16). The positive variance from our forecast was due to higher-than-expected sales volume which we believe came from the long-delayed new plants and better margins from higher nitrile glove sales volume.

Dividends

No dividend was declared in this quarter. Key Result

Highlights

QoQ, 3Q16 revenue rose by 35% on the back of a strengthening USD, increased capacity output from new and refurbished production lines. Coupled with the implementation of some cost controls and better sales mix skewed towards higher margin nitrile gloves, PBT margin rose 2.7%-pts from 12.9% to 15.6% in 3Q16. This brings 3Q15 PAT to RM38m (+54% QoQ) due to higher effective tax rate.

YoY, 9M16 revenue and net profit rose 2% and 8%, respectively, achieved on the back of a stronger USD which had increased by 11% since the last quarter, coupled with increased capacity output from new and refurbished production lines as well as a better sales mix which has seen the higher margin nitrile glove sales increased.

Outlook

We understand that capacity from this quarter is derived from the new plants and judging by this quarter’s performance, we expect subsequent quarters’ growth and earnings to be underpinned by volume growth from the new plants.

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 upgrading our FY16E and FY17E net profits by 9-20%, taking into account of higher volume growth and better margins.

Rating & Valuation

Correspondingly, we upgrade our TP from RM2.60 to RM2.83 based on an unchanged target PER of 13x and our revised FY17 EPS.

Upgrade to Outperform (from Market Perform).

Risks to Our Call

Slower-than-expected commissioning of new plants.

Source: Kenanga Research - 27 Nov 2015