9M16 PATAMI of RM126.3m (-15% YoY) came in below expectations, at 58% and 60% of our and consensus full-year forecasts. The negative variance was due to: (i) lower-thanexpected volume due to an unexpected plant revamp work on one of the plants, and (ii) lower-than-expected ASPs. By the same token, we conservatively cut both FY16E and FY17E net profits by 8%. Correspondingly, our TP is cut from RM7.50 to RM6.90 based on an unchanged 19.5x PER target and our revised FY17E EPS. Downgrade from OUTPERFORM to MARKET PERFORM.

Key Result Highlights

QoQ, 3Q16 revenue rose by 2.5% to RM414m due largely to higher contribution from gloves division (+2.9%), which accounted for more than 86% of total revenue. Specifically, gloves revenue rose 2.9% due to higher volume growth (+3% QoQ). The lower-than-expected volume growth was due to down time as a result of revamp work on one of the plants involving two production lines of which was unexpected. Pre-tax margin fell to 10.3% in 3Q16 compared to 12.6% in 2Q16 due to higher production cost from hikes in minimum wage and natural gas cost and stiffer pricing competition. This brings 3Q16 net profit to RM34m (-17% QoQ). A first interim DPS of 5.0 sen was declared in this quarter which came in within our expectation.

YoY, 9M16 revenue rose 2.8% largely due to rubber gloves (+2%) which accounted for 86% to total revenue. Gloves turnover was largely driven by 2% volume growth due to lower production emanating from the plant revamp and maintenance works in two of its production plants since 2Q16. The revamp and upgrading works involved replacing biomass system to natural gas and upgrading of twelve older production lines. The modification is necessary in an effort to put a brake on higher production cost, including energy cost. Due to price competition and cost pressure from raw material prices and higher natural gas cost, 9M16 pre-tax profit fell 16% as pre-tax margin fell 3ppts to 12.9% from 15.9% in 9M15. This brings 9M16 PATAMI to RM126.3m (-15% YoY).

Outlook. The on-going revamp works could take longer than expected and hamper higher utilisation rate and hence earnings over the next two to three quarters. As such, based on current valuations of 22x and 19.6x on FYE16 and FY17E EPS compared to a growth rate averaging 5% each in FY16 and FY17, the stock appears to be trading at rich valuations. Over the next subsequent quarters, earnings will be underpinned by the balance capacity of some 2.0b pieces of glove spilling over from two plants which were completed in July 2015. Beyond FY16, the Group is currently constructing one new plant at Jalan Meru (Site 1) which is capable of producing 3.0b pieces of glove per annum. The construction work has since commenced in May 2016 and is expected to be completed in the third quarter of 2017.

Downgrade to MARKET PERFORM, cut FY16E and FY17E net profits. Due to the poor set of results, we conservatively cut our FY16E and FY17E net profits by 8% each to take into account the lower-than-expected volume sales. Correspondingly, our TP is lowered from RM7.50 to RM6.90 based on unchanged 19.5x FY17E EPS. Downgrade from OUTPERFORM to MARKET PERFORM.

Source: Kenanga Research - 23 Nov 2016