12M17 net profit of RM70.2m (-33% YoY) came in below expectations, at only 78%/75% of our/consensus full-year forecasts. At pre-tax profit level, 12M17 results came in within expectations. The negative deviation from our forecast was due to higher-than-expected effective tax rate. We downgrade our FY17E and FY18E net profits by 11% and 6%, respectively, to take into account higher-thanexpected expenses and taxes. TP lowered from RM1.95 to RM1.70 based on unchanged 12x FY18E revised EPS. Reiterate MARKET PERFORM.

Key Result Highlights QoQ, 4Q17 revenue rose 1.4% due to lower volumes sales but more than offset by higher ASPs. There were no guidances in terms of actual volume sales and ASPs growth in their results commentary. We believe higher input raw material during the wintering months resulted in higher ASPs which led to lower volume sales. 4Q17 PBT rose 73% due to the low base effect in 3Q17 as PBT margin expanded by 4.8ppts to 11.5% due to lower input raw material prices and an insurance payment received. However, due to a lumpy tax payment registered this quarter, 4Q17 PATAMI fell 58% to RM8.3m, dragged down by higher effective tax rate of 66% compared to 8% in 3Q17. This quarter marked the fourth consecutive quarterly earnings disappointment. We are unable to ascertain whether the tax rate is expected to recur in subsequent quarters. No dividend was declared in this quarter which is below our expectation.

YoY, 12M17 net profit of RM70.2m (-33% YoY) came in below expectations, at only 78%/75% of our/consensus full-year forecasts. At pre-tax profit level, 12M17 results came in within expectations. The negative deviation from our forecast was due to higher-than-expected effective tax rate. 12M17 revenue rose 3% (comparable 12M period) due to higher output recorded from some refurbishment work done, higher average selling prices in response to increased raw material prices as well as a stronger USD vs Ringgit. Overall 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 eroded margin. As a result, PBT margin was lower by 1.8ppts to 9.8% from 10.6% in 12M16. This brings 12M17 PATAMI to RM70.2m (-32% YoY) dragged down by higher effective tax rate of 33.6% compared to 21.6% in 12MFY16.

Outlook. There were no guidances in terms of new capacity expansion, volume sales and ASPs in the results commentary and details were also scant in terms of the outlook. 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 2015 to 2016.

Downgrade FY18E and FY19E net profits by 11% and 6%, respectively. Due to the poor visibility in terms of forward looking guidance and the weaker-than-expected results, we downgrade FY18E and FY19E net profits by 11% and 6%, respectively, to take into account the higher-than-expected expenses and taxes. Correspondingly, we lowered our TP from RM1.95 to RM1.70 based on unchanged 12x FY18E revised EPS (at +0.5 SD above its historical forward average). Reiterate MARKET PERFORM.

Source: Kenanga Research - 30 Aug 2017