9M18 PATAMI of RM141.3m (+2.6% YoY) came in at 68% of our/consensus forecasts. We consider the results as within expectation in anticipation of higher full-quarter contribution from Plant 16 and 17 in 4Q18 following commercial production in Aug and Nov 2018, respectively. Upgrade FY19E net profit by 13.8% to take into account higher utilisation rate of 86% from 80%. TP is raised from RM3.45 to RM4.95 based on 25.5x FY19E EPS. Upgrade from UP to OP.

9M18 PATAMI of RM141.3m (+2.6% YoY) came in at 68% of our/consensus full-year forecasts. We consider the results as within expectation in anticipation of higher full-quarter contribution from Plant 16 and 17 in 4Q18 following commercial production in Aug and Nov 2018, respectively. No dividend was declared as expected.

Key result highlights. QoQ, 3Q18 revenue rose 15.5% due to higher contribution from rubber gloves (+17%) underpinned by higher ASPs (+1.8%) and volume sales (+7.7%) underpin by new capacity from Plant 16 which commenced operations in Aug 18, albeit on a higher base, which accounted for 88% of total revenue. Overall, PBT margin expanded by 1.2ppt to 12.3% in 3Q18 compared to 11.1% in 2Q18 due to increased manufacturing and production efficiency and effective cost controls. This brings 3Q18 net profit to RM54.1m (+24.6% QoQ).

YoY, 9M18 revenue rose 5% due to higher contribution from the Gloves division (+4%) underpinned by higher volume sales (+7.9%) and ASP (+4.8%) which was boosted by the improved performance in the TRP division compared with 9M17. The TRP division’s revenue rose 12% in 9H18, while PBT soared 69% attributable to increased sales deliveries and sales of higher margin products. This brings 9M18 PATAMI to RM141.3m (+2.6% YoY).

Outlook. Looking ahead, Plant 16 is expected to anchor subsequent quarters earnings, which was fully commissioned in Aug 2018. It has an installed capacity of 3b pieces per annum and will focus on the Group’s patented Low Derma Technology gloves. The group has started commercial production of Plant 17 (1.5b pieces) in Nov 2018. Construction works for Plant 18 (2.5bn pieces) and Plant 19 (3.0bn pieces) are currently on-track, with expected full commissioning by 2Q 2019 and 4Q 2019, respectively. . Upon completion, these three new plants will add additional 7b pieces of gloves per annum, bringing the group’s total installed capacity to 35bn (+25%) pieces of gloves per year by end FY2019. The next phase of expansion programme will be focused on Bidor, Perak, which is intended to accommodate the group’s expansion in a centralised location (i.e. an integrated glove manufacturing facility) over the medium and longer term. The Group expects the expansion, which is currently in the planning stage, to commence in 2020 and to take eight years to complete.

Upgrade FY19E net profit by 13.8% to take into account higher utilisation rate of 86% from 80%

Upgrade from Underperform to Outperform. Correspondingly, our TP is raised from RM3.45 to RM4.95 based on 25.5x FY19E revised EPS (+1.5 SD above 6-year historical forward mean) from 20x previously to better reflect the strong YoY earnings growth in subsequent quarters ahead.

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

Source: Kenanga Research - 19 Nov 2018