9M17 PATAMI of RM137.7m (+9% YoY) came in below expectations at 65%/66% of our/market full-year net profit forecasts. The negative variance form our result was due to slower-than-expected ramp up in new lines. As such we downgrade our FY17E/FY18E net profit by 9.6%/6.5%. TP is lowered from RM6.85 to RM6.70 based on 20.5x FY18E EPS (+1.0 SD above 6-year historical forward mean). Downgrade from MARKET PERFORM to UNDERPERFORM.

9MFY17 result below expectations. 9M17 PATAMI of RM137.7m (+9% YoY) came in below expectations at 65%/66% of our/market fullyear net profit forecasts. The negative variance from our result was due to slower-than-expected ramp up in new lines. An interim DPS of 5.5 sen was declared, which is within our expectation.

Key Result Highlights. QoQ, 3Q17 revenue was flat at RM489m (- 0.3%) due to lower contribution from gloves division (-3.8%) which accounted for 90% of total revenue but mitigated by technical rubber products division (+12.5%). The lower gloves revenue was due to lower ASPs (-7%) and offset by higher volume sales (+7.5%). PBT margin remains stable at 11.9% compared to 11.4% in 2Q17 following the easing of input latex cost. This brings 3Q17 net profit to RM45.7m (+0.4% QoQ) due to a higher effective tax rate of 20.9% compared to 18.3% in 2Q17.

YoY, 9M17 revenue rose 20% due to higher ASPs (+9%) and volume sales (+7%) upon gradual ramp up in gloves production lines, following maintenance works. Due to price competition and cost pressure from raw material prices and higher natural gas cost, 9M17 pre-tax profit fell 7.3% as pre-tax margin fell 1.4pp to 11.5% from 12.9% in 9M16. This brings 9M17 PATAMI to RM137.7m (+9% YoY) mitigated by a lower effective tax rate of 18.5% compared to 19% in 9M16.

Outlook. Looking ahead, Plant 16, which was initially expected to be completed in July 2017, can only be completed by end Dec. The delay was due to machine installation and water supply issues. Two of the eight production lines were completed in Oct, currently under production-trial, with another six lines to be completed by Dec. Plant 16, which have an installed capacity of 3b pieces per annum, will focus on the Group’s patented Low Derma Technology gloves. Once plant 16 is completed, the Group will be operating at 25b pieces capacity (+14%). 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 two new plants which are equipped with high speed dipping technology and high degree of automation are capable of producing up to 4.5b pieces (+18% of current production capacity, 1.5b and 3.0b pieces respectively) of nitrile gloves per annum once completed in 2018.

We downgrade our FY17E/FY18E net profit by 9.6%/6.5% to take into account of the slower-than-expected ramp up in new lines.

Downgrade from Market Perform to Underperform. Correspondingly, TP is lowered from RM6.85 to RM6.70 based on 20.5x FY18E revised EPS (+1.0 SD above 6-year historical forward mean) from +0.5 SD previously, which is inline with our sector target. The stock is trading at PER rich valuation at 27x and 25x FY17 EPS and FY18 EPS, respectively, compared to average growth of 10%. Downgrade from MARKET PERFORM to UNDERPERFORM.

Key risk to our call is faster-than-expected commissioning of the new plants.

Source: Kenanga Research - 24 Nov 2017