9MFY20 PATAMI of RM545m (+233%YoY) came in above expectations at 80%/74% of our/consensus full-year forecasts. The variance to our estimate was due to higher- than-expected ASP. The group is confident of sustained strong demand with order-book filled up till end-CY21, reaffirming that the lag impact from ASP hike will continue to be felt moving into 1QCY21. We raised our FY20E/FY21E net profit by 51%/168% to account for higher ASP and margins. We lowered our target PER rating to <-0.5SD below 5-year mean (compared to above mean previously) to reflect a moderation in earnings growth towards more sustainable levels beyond FY22. TP is raised from RM8.55 to RM9.36 based on 11x FY21E EPS. Reiterate OP.

Key results’ highlights. QoQ, 3QFY20 revenue rose 47% due to higher contribution from rubber gloves (+50%) on higher volume sales (+9%) and ASP (+41%). Pre-tax profit rose 171% on the back of margin improvement due to higher ASP and better economies of scale and efficiency from new plants. Pre-tax margin rose 19.3ppt to 42.2% from 2QFY20. This brings 3QFY20 net profit to RM349m (+166% QoQ). A 1st interim DPS of 3.0 sen was announced which is within our expectation.

YoY, 9MFY20 revenue rose 43%, due to higher contribution from glove division (+46%), underpinned by higher volume sales (+21%) and ASP (+16%). This brings 9MFY20 PATAMI to RM545m (+233%).

Salient points from 3QFY20 results conference call, capacity expansion plans on track. The group is confident of sustained strong demand with orders lined up till end-CY21 while capacity ramp-up is on track to commence gradually and staggered throughout Oct, Nov, and Dec. ASP is up 25% m-o-m and as per its guidance, ASP in 1QFY21 is expected to be 15-20% higher compared to 4QFY20. In the meantime, the planned capacity expansion over the next two years are as follow:- (i) Plant 20 located adjacent to Plants 18 and 19 with 1.5b pieces capacity which is expected to come on stream by early 2021, (ii) a recently acquired land in Meru located adjacent to one of its current plants which is earmarked for a single plant with 5b pieces capacity and to be completed in two phases i.e. Phase 1 – 6 lines, 2b pieces commencing in 2H 2021 and Phase 2 – 10 lines, 3b pieces commencing in 1H 2022, and (iii) 12 lines with 4b pieces capacity to fully commission in 2H 2022 in Bidor. Upon completion, these three new plants will bring the group’s total installed capacity from 32b to 42.4b (+33%) pieces of gloves per annum.

FY20E/FY21E net profit raised by 51%/168%. However, due to the runaway ASP, we raise our FY20E/FY21E net profit by 56%/168% taking into account: (i) higher ASP from USD32/33 to USD35/52, and (ii) higher EBITDA margin, which we raised from 28%/28% to 36%/47%.

Maintain OP. Correspondingly, our TP is raised slightly from RM8.55 to RM9.36 based on 11x FY21E EPS (vs. 27x previously) (at <-0.5SD below 5- year historical forward mean). We lowered our PER rating as we believe valuations are already pegged to super-normal earnings; hence, moderation in earnings momentum beyond this phase should have been factored in. Reiterate Outperform.

Key risk to our call is lower-than-expected ASP.

Source: Kenanga Research - 10 Nov 2020