FY17 PATAMI of RM183.9m (+10% YoY) came in within our expectation at 97% but missed consensus full-year net profit forecasts by 5%. Separately, a share split of 1 into 2 was proposed. TP is RM7.35 based on an unchanged 21.5x FY18E EPS (+1.0 SD above 6-year historical forward mean). Maintain UNDERPERFORM.

FY17 in line with our forecast but missed consensus by 5%. 12M17 PATAMI of RM183.9m (+10% YoY) came in within our expectation at 97% but missed consensus full-year net profit forecast by 5%. Separately, a share split of 1 into 2 was proposed. No dividend was declared in this quarter (An interim DPS of 5.5 sen was declared in 3Q17). We expect a final dividend somewhere in April 2018.

Key Result Highlights. QoQ, 4Q17 revenue was lower by 2.3% due to lower contribution from gloves (-2.7%) which accounted for 87% of total revenue but mitigated by technical rubber products division (+11.2%). The lower gloves revenue was due to lower ASPs and offset by flat sales volume. PBT margin expanded 0.4pp to 12.3% compared to 11.9% in 3Q17, driven by the improvement in manufacturing efficiency, increased automation, and effective cost controls. This brings 4Q17 net profit to RM45.9m (+0.5% QoQ).

YoY, FY17 revenue rose 17% due to higher ASPs (+7%) and volume sales (+6%) upon gradual ramp-up in gloves production lines in Plant 16. Correspondingly, FY17 pre-tax profit rose 9.3% despite slightly lower margin due cost pressure from raw material prices as pre-tax margin fell 0.9pp to 11.7% from 12.6% in FY16. This brings FY17 PATAMI to RM183.9m (+10% YoY).

Outlook. Going forward, headwinds including higher natural gas price hikes (average of 22%, which was announced back in Nov 2017), the strengthening of MYR against the USD (-8% QoQ Jan and Feb 2018 compared to 4Q 2017) and potential hike in minimum wage could derail earnings. Looking ahead, Plant 16 which was initially expected to be completed in July 2017, was completed end Dec 2017. 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 nitrile gloves, the group has 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, at 1.5b and 3.0b pieces, respectively) of nitrile gloves per annum once completed in end 2018 or early 2019.

Reiterate Underperform. TP is RM7.35 based on unchanged 21.5x FY19E EPS (+1.0 SD above 6-year historical forward mean). The stock is trading at rich FY18E PER valuation of 27x (+1.5SD above 6-year forward historical mean) and FY19E PER of 26x, compared to average growth of 8% per annum over the next two years. Reiterate UNDERPERFORM.

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

Source: Kenanga Research - 23 Feb 2018