1H17 net profit of RM42.1m (-45% YoY) came in below expectations at only 31%/33% of our/consensus full-year forecasts. The negative deviation was due to lower-thanexpected sales. We downgrade our FY17E and FY18E net profits by 11% and 13, respectively, to take into account lower volume sales and higher-than-expected expenses incurred from its contact lens business. We lowered our TP from RM2.60 to RM2.15 based on 12x FY17E EPS (at +0.5 SD above its historical forward average). Downgrade from OUTPERFORM to MARKET PERFORM.

Key Result Highlights QoQ, 2Q17 revenue fell 12% as a result of reduced production output from some of its older plants. There were no guidances in terms of volume sales and ASPs in their results commentary and details were scant in terms of outlook going forward. However, PBT rose 2% as PBT margin expanded by 1.6ppts to 11.4% from 9.8%. We believe the margin expansion was due to higher ASPs taking the que from higher prices in the industry which more than offset higher minimum wages and natural gas price. As a result, PATAMI rose to RM22.6m boosted by a lower effective tax rate of 18% compared to 25.2% in 1Q17. No interim DPS was declared in this quarter which is within expectation.

YoY, 1H17 revenue fell 16% (comparing combined 3Q16 and 4Q16 results) due to lower volume sales in 2Q17 as a result of reduced production output from some of its older plants. Overall profitability was dragged down by higher minimum wages, natural gas price and additional costs for its contact lens division in terms of advertising and promotion expenses. As a result, PBT margin was lower by 5.2ppts to 10.6% from 15.7% in 1H16.

Outlook. There were no guidances in terms of new capacity expansion, volume sales and ASPs in the results commentary and details were scant in terms of outlook going forward. In the past, we understand that growth is expected to be driven by two new plants, namely Plant #10 and Plant #11 i.e. Lot 6059 and 6058 in Meru, Klang. However, due to the scant details, we are now unable to ascertain further progress of these plants. Recall, a few quarters ago, we highlighted that the two plants are expected to ramp up capacity by 32% to 23.2b, catering entirely to producing nitrile gloves and to be installed between 2015 till 2016.

Downgrade to MARKET PERFORM. Due to the poor visibility in terms of forward looking guidance and the weaker-than-expected results, we downgrade FY17E and FY18E net profits by 10% each to take into account the higher-than-expected expenses incurred from its contact lens business. Correspondingly, we lowered our TP from RM2.15 to RM2.60 based on 12x FY17E EPS (at +0.5 SD above its historical forward average). Downgrade from Outperform to Market Perform.

Source: Kenanga Research - 27 Feb 2017