9M17 net profit of RM61.9m (-36% YoY) came in below expectations, at only 51%/57% of our/consensus full-year forecasts. The negative deviation from our forecast was due to higher-than-expected operating expenses. We downgrade our FY17E and FY18E net profits by 26% and 11%, respectively, to take into account lower volume sales and higher-than-expected expenses incurred in its contact lens business. TP lowered from RM2.15 to RM1.95 based on 12x FY18E EPS. Reiterate MARKET PERFORM.

Key Result Highlights QoQ, 3Q17 revenue rose 30% as a on the back of increased output from refurbishment works carried out, higher average selling prices in response to higher raw material costs, and stronger US dollar vs the Ringgit. There were no guidances in terms of actual volume sales and ASPs growth in their results commentary. 3Q17 PBT fell 23% as PBT margin was eroded by 4.6ppts to 6.8% due to higher raw material prices, pre-operating costs incurred on new start-ups overseas as well as advertising & promotional costs incurred in launching new contact lens products overseas. This brings 3Q17 PATAMI to RM19.8m (-12.5%) boosted by a lower effective tax rate of 8% compared to 18% in 2Q17. A 1st single-tier DPS of 2.5 sen was declared in this quarter which is within our expectation.

YoY, 9M17 revenue fell 1.4% (comparable 9M period of July 2016 till March 2017 compared to July 2015 till March 2016) due to lower volume sales in 2Q17 as a result of reduced production output from some of its older plants. Overall higher raw material prices, preoperating costs incurred on new start-ups overseas as well as advertising & promotional costs incurred in launching new contact lens products overseas eroded margin. As a result, PBT margin was lower by 6.4ppts to 9.1% from 15.5% in 9M16. This brings 9M17 PATAMI to RM61.9m (-36% YoY).

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. Looking ahead, additional expenses will be incurred over the next 12 months to gain a larger share of the global contact lens market. 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 from the year of 2015 to 2016.

Downgrade FY17E and FY18E net profits by 26% and 11%, respectively. 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 26% and 11%, respectively to take into account the higher-than-expected expenses incurred from its contact lens business. We roll forward our base valuation from FY17E to FY18E. Correspondingly, we lowered our TP from RM2.15 to RM1.95 based on 12x FY18E EPS (at +0.5 SD above its historical forward average). Reiterate MARKET PERFORM

Source: Kenanga Research - 31 May 2017