1Q18 PATAMI of RM44.5m (-4.3% YoY; -3.0% QoQ) came in at 22%/20% of our/consensus full-year net profit forecasts. We consider results to be within our expectation in anticipation of higher subsequent quarterly earnings. Since our downgrade, the stock has fallen by 20% and valuations appear reasonable compared to peers. Hence, we upgrade the rating from UNDERPERFORM to MARKET PERFORM. TP is RM6.85 based on unchanged 20x FY19E EPS.

1Q18 Within Our Expectation But Below Consensus. 1Q18 PATAMI of RM44.5m (-4.3% YoY; -3.0% QoQ) came in at 22%/20% of our/consensus full-year net profit forecasts. We consider the results to be within our expectation in anticipation of higher quarterly earnings ahead underpinned by plant 16. No dividend was declared in this quarter.

Key Result Highlights. QoQ, 1Q18 revenue was up by 1.3% due to contribution from gloves (+1.2%), driven by higher sales volume (+3.4%) which accounted for 87% of total revenue. PBT margin eroded by 1.4ppt to 11.0% compared to 12.3% in 4Q17 due to higher fuel cost namely natural gas (+22%). Typically, players faced a 1-2 months’ time- lag in cost-pass-through arising from the increase in price of natural gas. This brings 1Q18 PATAMI to RM44.5m (-3.0%), boosted by a lower effective tax rate of 14.6% compared to 21.2% in 4Q17.

YoY, 1Q18 revenue fell 3.2% due to lower ASPs but mitigated by higher glove sales volume (+2.7%). Despite the time-lag in cost-pass- through arising from the increase in price of natural gas (+22%), PBT margin was only slightly lower at 11% compared to 11.4% in 1Q17. This brings 1Q18 PATAMI lower by 4.3% to RM44.5m thanks to a lower effective tax rate of 14.6% compared to 16.1% in 1Q17.

Outlook. Looking ahead, the glove former issue that affected Plant 16 has been resolved with all lines expected to be commercially ready by July 2018 following two earlier scheduled delays. Plant 16 has an installed capacity of 3b pieces per annum and will focus on the Group’s patented Low Derma Technology gloves. With the completion of plant 16, the Group is now 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 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 3Q18 (Plant 17) and 1Q19 (Plant 18). However, potential headwinds from a potential hike in minimum wage could derail earnings growth.

Upgrade from UNDERPERFORM to MARKET PERFORM. TP is RM6.85 based on unchanged 20x FY19E EPS (+1.0 SD above 5-year historical forward mean). Since our downgrade in Nov 2017, the stock has fallen by 20%. At current level, valuations appear reasonable compared to peers. Hence, we upgrade the stock rating from UNDERPERFORM to MARKET PERFORM. We believe the stock is trading at a discount of 30% compared to the sector average due to its plant delays and trailing behind peers in terms of capacity expansion.

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

Source: Kenanga Research - 25 May 2018