12M16 PATAMI of RM170.9m (-16% YoY) missed our and market expectations by 15% and 7%, respectively. The negative variance was due to lower-than-expected volume sales brought about by an unexpected plant revamp work on one of the plants and lower-than-expected ASPs. By the same token, we conservatively cut both our FY17E and FY18E net profits by 7%. Correspondingly, our TP is cut from RM6.90 to RM6.50 based on an unchanged 19.5x PER target and our revised FY17E EPS. Reiterate MARKET PERFORM.

Key Result Highlights

QoQ, 4Q16 revenue rose by 6% due largely to higher contribution from gloves division (+7%) on higher ASPs (+2%) and volume sales (+2.3%), which accounted for 87% of total revenue. The lower-thanexpected volume growth was due to down times as a result of revamp work on one of the plants involving two production lines which have gradually resumed in 4Q16. By the same token, pre-tax margin improved to 12.4% from 10.3% in 3Q16. This brings 4Q16 net profit to RM44.6m (+31% QoQ) due to a lower effective tax rate of 16% compared to 19% in 3Q16. No dividend was declared in this quarter.

YoY, 12M16 revenue rose 2% due to lower ASPs but higher volume sales (however, volume sales came in lower-than-expected due to production interruption for upgrading and conversion of fuel from biomass to natural gas. Recall, the plant revamp and maintenance work in two of its production plants since 2Q16. The revamp and upgrading works involved replacing a biomass system for natural gas and upgrading of twelve older production lines. Due to price competition and cost pressure from raw material prices and higher natural gas cost, 12M16 pre-tax profit fell 20% as pre-tax margin fell 3.6ppts to 12.8% from 16.4% in 12M15. This brings 12M16 PATAMI to RM170.9m (-16% YoY) mitigated by a lower effective tax rate of 18% compared to 23% in 12M15.

Outlook. Since early 4Q16, the gloves division has fully commissioned its Combined Heat and Power Cogeneration Natural Gas Generator Set (COGEN) at two factory locations i.e conversion of fuel from biomass to natural gas, and production has gradually improved to 80% utilisation level. However, we expect the next two quarters’ earnings to be weak on the back of higher raw material latex cost as well as gradual ramp up in production. 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. Separately, the Bestari Jaya land (56 acres industrial land) project has been delayed until the end of 2017 due to building plans and water supply constraints.

Cut our FY17 and FY18 net profits. Due to the poor set of results, we conservatively cut our FY17E and FY18E net profits by 7% each to take into account the lower-than-expected volume sales. Correspondingly, our TP is lowered from RM6.90 to RM6.50 based on unchanged 19.5x FY17E EPS. Maintain MARKET PERFORM.

Source: Kenanga Research - 24 Feb 2017