1H17 PATAMI of RM92m (-0.2% YoY) came in within expectations at 44%/43% of our/market expectations full-year net profit forecasts. We expect better performance in subsequent quarters underpinned by a more conducive operating environment with less competitive pressure and low raw material cost. We upgrade our FY18E net profit by 5% to take into account of higher utilisation rate of 82% compared to 80%. Correspondingly, TP is raised from RM6.60 to RM6.85 based on an unchanged 19.5x on FY18E EPS. Reiterate MARKET PERFORM.

Key Result Highlights

QoQ, 2Q17 revenue fell 2% due to lower contribution from technical rubber products division (-30%) but was mitigated by higher contribution from gloves division (+2.2%) on higher ASPs (+5.8%) and flat volume, albeit higher base, which accounted for 90% of total revenue. The lower sales contribution from infrastructure products and longer time-lag effect in passing on increased raw material cost to customers led to lower performance in the Technical Rubber Products division. PBT margin remains stable at 11.4% compared to 11.3% in 1Q17 following the easing of input latex cost. This brings 2Q17 net profit to RM45.5m (- 2% QoQ) due to a higher effective tax rate of 18.3% compared to 16.1% in 1Q17. We expect margins to improve post wintering months and higher volume sales. No dividend was declared in this quarter as expected.

YoY, 1H17 revenue rose 21% due to higher ASPs (+11.2%) and volume sales (+6.7%) upon a gradual ramp up in production lines, following the maintenance works. Due to price competition and cost pressure from raw material prices and higher natural gas cost, 1H17 pre-tax profit fell 3.4% as pre-tax margin fell 3ppts to 11.3% from 14.3% in 1H16. This brings 1H17 PATAMI to RM92m (-0.2% YoY) mitigated by a lower effective tax rate of 17.2% compared to 19.1% in 1H16.

Outlook. Currently, the Group is operating with 25 billion pieces capacity (+14%) following the completion of Plant 16 in end-July 2017. In anticipation of higher demand for Low Derma technology nitrile gloves, the group has since started the construction works for Plant 17 and 18. These 2 new plants which are equipped with high speed dipping technology and a high degree of automation are capable of producing up to 4.5 billion pieces (+18% of current production capacity) (1.5 and 3.0 billion pieces respectively) of nitrile gloves per annum once completed in 2018. The construction works of the integrated Research and Development with Training Centre (“RDTC”) are progressing smoothly and expected to complete by end of 2017. The RDTC is expected to focus on all areas of new innovations and quality improvements. It will also involve research into engineering and robotic implementations to provide higher automation systems to new and existing facilities with the aim of lowering dependence on manpower.

We upgrade our FY18E net profit by 5% to take into account of higher utilisation rate of 82% in expectation of higher demand compared to 80% previously.

Maintain Market Perform. Correspondingly, TP is raised from RM6.60 to RM6.85 based on an unchanged 19.5x FY18E EPS (+0.5 SD above 5-year historical forward mean). We expect better performance in subsequent quarters underpinned by the gradual ramp-up in production and conducive operating environment with less competitive pressure and low raw material cost. Reiterate MARKET PERFORM. Key risk to our call is faster-than-expected commissioning of the new plants.

Source: Kenanga Research - 25 Aug 2017