1QFY21 Core PATAMI of RM1,092m (+122%QoQ; +16-fold YoY) came in above expectations at 42%/43% of our/consensus full-year forecasts. The positive variance from our forecast is due to higher-than-expected ASP. Hence, we raised FY21E net profit by 37% imputing higher ASP but maintain FY22E earnings forecast. A retracement in ASP, if any, would likely be gradual and cushioned by re-stocking activities. According to the Malaysian Rubber Glove Manufacturers Association, the global shortage of rubber gloves will sustain beyond 1QCY22 with growth rate averaging between 15% and 20% per annum compared to pre-COVID-19 times of 8% to 10%, and with still high lead time averaging six to eight months. We maintain our TP of RM6.00 based on unchanged 12x CY22E EPS. Reiterate OP.

Key results’ highlights. QoQ, 1QFY21 revenue rose 68% due to higher contribution from rubber gloves (+73%), propelled by stronger ASP hike which we estimate to be 45-50% and higher volume sales growth, estimated at 15-20%, pending details to be gleamed from an analysts’ briefing later today. Pre-tax profit rose 79% on the back of margin improvement due to higher ASP. Pre-tax margin rose 3.2ppt to 62.7% from 58.5% in 4QFY20. This brings 1QFY21 core net profit excluding a one-off COVID-19 contribution (RM50m) to RM1,092m (+122% QoQ) which was further boosted by a lower effective tax rate of 24% compared to 29% in 4QFY20. A 1st interim DPS of 12.0 sen was declared which came in within our expectation. YoY, FY21 revenue rose 259%, due to higher contribution from glove division (+282%), underpinned by higher volume sales and ASP as mentioned above.

Outlook. Note that delivery lead time for certain industry players have reduced, suggesting lower nitrile ASP ahead. 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, staggered throughout Oct, Nov, and Dec. In the meantime, the planned capacity expansion over the next two years are as follows:- (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 – 2 lines from Plant 18 has commenced production, (ii) a recently acquired land in Meru located adjacent to one of its current plants is earmarked for a single plant with 5b pieces capacity 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 2HCY22 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.

Raised FY21E net profit by 37% after hiking our ASP projection from USD61/1,000 to USD68/1,000 pieces. Our FY22E ASP assumption remain pegged at USD40/1,000 pieces.

Maintain OP. Our TP is RM6.00 based on unchanged 12x CY22E EPS (at - 0.5SD below 5-year forward historical mean). Our target PER is at a 30% discount to the normalised 5-year pre-COVID-19 historical forward mean average of 18x. In our view, from the perspective of a long-term investor, we still see significant value being derived from Malaysian glove players which command 65-68% of global market share which have consistently evolve and innovate in terms of products and plant modernization via automation.

Key risks to our call include: (i) ASP falling steeper and sooner than expected and (ii) faster-than-expected vaccine roll-outs.

Source: Kenanga Research - 21 Apr 2021