1H18 PATAMI of RM88m (-4.4% YoY) came in at 42%/41% of our/consensus full-year forecasts. We consider the results as within expectation in anticipation of higher subsequent quarterly earnings following commercial production of Plant 16. The stock is trading at 26x PER (>1.5SD above 5-year historical forward average) or 25% discount to the sector average due to its slower-than-expected capacity ramp up. TP is RM3.45 based on 20x FY19E EPS. Maintain UP.

1H18 PATAMI of RM88m (-4.4% YoY) came in at 42%/41% of our/consensus full-year forecasts. We consider the results as within our expectation in anticipation of higher subsequent quarterly earnings following the commercial production of Plant 16 in July 2018. No dividend was declared as expected.

Key result highlights. QoQ, 2Q18 revenue rose 2.6% due to higher contribution from rubber gloves (+3.1%) underpinned by higher ASPs (+3.4%) and volume sales (+2.8%), albeit on a higher base, which accounted for 87% of total revenue. The Technical Rubber Product (TRP) division’s revenue rose 2.2% mainly attributable to sales from higher margin products. Overall, PBT margin remained stable at 11.1% compared to 11.3% in 1Q18 due to time-lag in cost-pass-through arising from the increase in raw material costs (NBR +10.14%). This brings 2Q18 net profit to RM43.4m (-2% QoQ) due to a higher effective tax rate of 18.6% compared to 16.1% in 1Q18.

YoY, 1H18 revenue fell 1% due to lower contribution from the Gloves division which was largely mitigated by the improved performance in the TRP division compared with 1H17. The gloves division’s revenue fell 2.8% mainly due to flat ASPs and more than offset by higher volume sales (+5.8%). The TRP division’s revenue rose 7.7% in 1H18, while PBT soared 60.9%. The improved performance was mainly attributable to increased sales of higher margin products. This brings 1H18 PATAMI to RM88m (-4.4% YoY) mitigated by a lower effective tax rate of 16.6% compared to 17.2% in 1H16.

Outlook. Looking ahead, the glove former issue that affected Plant 16 has been resolved and fully commissioned in Aug 2018 (was commercially ready by July 2018 following two 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. Construction works for Plant 17 (1.5b pieces), 18 (2.5b pieces) and 19 (3b pieces) are underway and expected to be fully commissioned by the 4Q 2018, 2Q 2019 and 4Q 2019, respectively. Upon completion, these three new plants are capable of producing additional 7b pieces of gloves per annum, bringing the Group’s total installed capacity to 32b pieces of gloves per annum by FY19.

Reiterate Underperform. Our TP is RM3.45 based on unchanged 20x FY19E EPS (+1.0 SD above 6-year historical forward mean). The stock is trading at 26x PER (>1.5SD above 5-year historical forward average) or at a 25% discount to the sector average due to its slower-thanexpected capacity ramp up.

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

Source: Kenanga Research - 20 Aug 2018