1Q19 core net profit of RM29.5m (+5.6% YoY) came in within expectations of our/consensus expectations by 25%/23% from full-year net profit forecasts. The stock is traded at a steep discount of 30% compared to the sector average due to its weak earnings guidance and it trailing behind peers in terms of capacity expansion and innovation. Maintain UP. TP is RM2.60 based on unchanged 15x FY19E EPS.

1Q19 core net profit came in within expectations. 1Q19 core net profit excluding one-off insurance claims (RM6.5m) came in at RM29.5m (+5.6% YoY) which is within expectations of our/consensus expectations by 25%/23% full-year net profit forecasts. No interim dividend was declared in this quarter as expected.

Key result highlights. QoQ, 1Q19 revenue rose 11.4% due to higher volume sales from the rebuilt plant in Perak, which commenced on 18 July 2018 with annual production capacity of 1.35b gloves. There was no guidance in terms of actual volume sales and ASPs growth in their results commentary. However, 1Q19 PBT rose by >100% due to improvement attributed to a combination of factors, including higher sales recorded, decreased costs from improved operational efficiency and the absence of extraordinary one-off costs recorded in 4Q18. This brings 1Q19 core net profit (excluding one-off insurance claims RM6.5m) came in at RM29.5m boosted by the erratic quarterly effective tax rate of 32% compared to 51% in 4Q18.

YoY, 1Q19 core net profit excluding one-off insurance claims (RM6.5m) came in at RM29.5m (+5.6% YoY) was due to stronger revenue (+17.6%) underpin by added capacity from the remaining lines that were commissioned at its 2 newest plants in end 2017. Profitability improved on efforts taken to improve efficiency and productivity, including the refurbishment of the older lines and streamlining of work processes.

Outlook. Following the completion of Plant 10 (2.2b pieces) and Plant 11 (3.4b pieces) in end 2017, the group’s installed capacity rose 30% to 23b pieces from 17.8b which is expected to drive growth in FY19. The group is undertaking a strategy, focusing on rebuilding and replacing of old factories with new high efficiency production lines with speed up to 38-40k (vs 18k per line per hour) pieces of gloves per hour per line. The capacity plans are; (i) convert the unused warehouse in Block F (Kamunting, Taiping) (new capacity of 2b pieces), (ii) decommissioning old lines at Sungai Buloh plant from 12 to 20 lines (capacity increasing 97% to 2.4b pieces), and (iii) to build Plant 12 behind the existing factory in Meru Klang, i.e. Plant 10 and Plant 11. Upon full commercial production in stages from 3Q 2018 till end 2H 2019, installed capacity will rise 16% to 27.2b pieces per annum.

Reiterate UNDERPERFORM. TP is unchanged at RM2.60 based on 15x FY19E EPS (at +1.0 SD above its historical forward average). The group is traded at a steep discount of 30% compared to the sector average due to its weak earnings guidance and it trailing behind peers in terms of capacity expansion and innovation.

Key upside risks to our call are faster-than-expected volume sales and lower-than-expected tax rate.

Source: Kenanga Research - 02 Nov 2018