9M19 PATAMI of RM364.8m (+13% YoY) came in within our, but below consensus, expectations at 75%/71% of respective full-year forecasts. Intensified competition in the nitrile gloves segment coupled with incoming supply could potentially pressure ASPs and scupper earnings in subsequent quarters. Following share price retracement by 28% from its peak last year, we upgrade our call from UP to MP. TP is at RM5.15 based on 32.5x CY19 EPS.

9M19 PATAMI of RM364.8m (+13% YoY) came in within our but below consensus expectations at 75%/71% of respective fullyear forecasts. A 2nd interim dividend of 2.2 sen was declared in this quarter bringing 9M19 to 4.4 sen which is within expectation.

Key results’ highlights. QoQ, 3Q19 revenue rose 1.3% due to higher sales volume (+3%) which more than offset lower ASP (-2%). The higher volume sales were due to commercial production of four lines in Plant 5. 3Q19 PBT margin increased 0.8ppt to 20.7% from 19.9% in 2Q19 which we believe was due to better economies of scale and efficiency from NGC. This brings 3Q19 PATAMI to RM119.8m (-0.4% QoQ) due to a higher effective tax rate of 20.4% compared to 15.4% in 2Q19.

YoY, 9M19 revenue rose by 20% due to higher sales volume (+13%) and ASP (+6%). Correspondingly, PBT rose 12% due to increase in sales volume despite PBT margin eroding by 1.5ppt to 20.4% from 21.9% in 9M18. This brings 9M19 PATAMI to RM364.8m (+13% YoY) due to lower effective tax rate of 16.7% compared to 17.5% in 9M18.

Potential competitive pressure. Tell-tale signs like normalising demand and intensified competition are pointing towards a potential slower set of results in subsequent quarters. Anecdotal evidence suggests that shorter delivery lead time does indicate that strong demand is tapering off and players ramping up production could result in further ASP pressure. From our channel checks, we gather that competition in the nitrile gloves segment has intensified, leading to pressures on ASPs.

Outlook. Looking ahead, Plant 5 of NGC facility has commissioned 6 out of 12 lines with remaining production lines to come on progressively by end 1H 2019. Construction of Plant 6 structure has started with the supporting facilities to follow in the second half of calendar year 2019. Plant 5 and Plant 6 will each have annual installed capacity of 4.7b pieces. Additionally, construction of Plant 7 is expected to begin in May 2019, which will focus on small orders as well as specialty products with an annual installed capacity of 2.6b pieces. We expect contributions from Plant 5 to drive FY19 earnings growth. Once completed, Plant 5 is expected to boost additional capacity by 14.5% to 37.2b pieces per annum. All in, Plant 5, 6 and 7 will add a total capacity of 12.1b pieces, raising installed capacity by 27% to 44.6b pieces per annum.

Upgrade from UP to MP. Following the share price retracement by 28% from its peak last year and reaching our target price, we upgrade our call from UP to MP. TP remains at RM5.15 based on an unchanged 32.5x PER (at +1.0 SD above 5-year historical forward mean) over CY19 EPS.

Risks to our call. Lower-than-expected volume sales and slowerthan-expected commissioning of new production lines.

Source: Kenanga Research - 13 Feb 2019