1H19 core net profit of RM67.6m (+6.0% YoY) came in at 57%/52% of our/consensus full-year forecasts. We consider the result to be within our expectation as we expect tougher quarters ahead due to intensifying competition in the nitrile gloves segment coupled with incoming supply that could potentially lead to pressures on ASPs. Maintain UP. TP is RM1.30 based on an unchanged 15x FY19E EPS.

1H19 core net profit of RM67.6m (+6.0% YoY) came in at 57%/52% of our/consensus full-year net forecasts. We consider the result to be within our expectation as we expect tougher quarters ahead in anticipation of intensifying competition and strengthening of MYR against USD. A 1st interim dividend of 1.5 sen was declared in this quarter as expected.

Key result highlights. QoQ, 2Q19 revenue rose 5% due to higher volume sales from the new replacement lines at its Perak plant and full quarter contribution from Plant #10 and #11. There was no guidance in terms of actual volume sales and ASPs growth in their results commentary. 2Q19 PBT rose by 3% due to improvement attributed to a combination of factors, including higher sales recorded, decreased costs from improved operational efficiency. This brings 2Q19 core net profit of RM38.1m (+29.2% QoQ) due to lower effective tax rate of 28.7% compared to 31.7% in 1Q19. Note that 1Q19 core net profit (excluding one-off insurance claims RM6.5m) came in at RM29.5m.

YoY, 1H19 core net profit excluding one-off insurance claims (RM6.5m) came in at RM67.6m (+6.0% YoY) due to stronger revenue (+14.6%) underpinned by the new replacement lines at its Perak plant and full quarter contribution from Plant #10 and #11. Profitability improved on efforts taken to improve efficiency and productivity, including the refurbishment of the older lines and streamlining of work processes.

Outlook. Tell-tale signs like normalising demand and intensified competition are pointing towards a potentially 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. 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-enhancing plans are as follow:- (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 RM1.30 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’s 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 - 13 Feb 2019