FY21 PATAMI of RM2,885m (+565% YoY) came in below expectations at 88%/94% of our/consensus full-year forecasts due to lower-than-expected volume sales arising from global container shortages. We lower our FY22E net profit by 12% after conservatively lowering our ASP from USD65/1,000 pieces to USD62/1,000 pieces. Our FY23E ASP assumption remains pegged at USD40/1,000 pieces. Correspondingly, our TP is trimmed from RM17.00 to RM16.00 based on unchanged 17x CY22E EPS of 94.1 sen (at -0.5SD below 5-year historical forward mean).

Results’ review. QoQ, 4QFY21 revenue rose 8%, thanks to higher ASP (+53%) but negated by lower volumes sales (-29%) due to challenges faced in shipment availability caused by the global container shortages as well as temporary shutdown of certain production lines as a preventive measure and safety precaution in dealing with COVID-19 cases. EBITDA margin expanded by 8ppt from 62% in 3QFY21 to 70% in 4QFY21 due to higher ASP. This brings 4QFY21 PATAMI to RM1,119m (+12%). A third interim DPS of 17.7 sen was declared, bringing FY21 DPS to 31.2 sen which is within our expectation. However, we expect a final dividend to be announced in 2H 2021.

YoY, FY21 revenue rose 129% due to higher volume sales (+12%), and ASP (+104%). EBITDA margin expanded by 34ppt to 59% from 25% due to higher ASP which more than offset higher raw material price. This brings FY21 PATAMI to RM2,885m (+565% YoY).

Outlook. The group is confidently expecting the container shortage to be resolved in the next quarter. While ASP is expected to be higher in 1QFY22, the recently announced results of industry peers suggest that the nitrile ASP uptrend could be waning and is expected to soften albeit at a slower pace on the back of still robust demand but unlikely to fall off a cliff. According to Malaysian Rubber Glove Manufacturers Association, the global shortage of rubber gloves will last beyond 1Q 2022 with growth rate averaging between 15% and 20% per annum going forward with still high lead time averaging 6-8 months though lower compared to 12-14 months previously. The lead times suggest that CY22 demand will remain strong. To date, 6 out of 10 lines in Plant 7 have been commissioned. Upon full commissioning, Plant 7 will have an annual installed capacity of 2.7b pieces. In addition, construction for the upcoming expansion, NGC 1.5, is currently underway and expected to commission the first line by December 2021. NGC 1.5 expansion plans include 4 additional production plants which will contribute 19b pieces to the annual installed capacity which is expected to increase to 63b pieces over the next 2 to 3 years.

We lower our FY22E net profit by 12% after lowering our ASP from USD65/1,000 pieces to USD62/1,000 pieces. Our FY23E ASP assumption remains pegged at USD40/1,000 pieces.

Reiterate OP. Correspondingly, TP is downgraded from RM17.00 to RM16.00 based on unchanged 17x CY22E EPS of 94.1 sen (at -0.5SD below 5-year historical forward mean). Our target PER is at a 35% discount to normalised 5-year pre-COVID historical forward mean averaging 26-28x. In our view, from the perspective of a long-term investor, we still see significant value in Malaysian glove players which command 65-68% of global market share and have consistently evolve and innovate in terms of products and plant modernization via automations.

Risk to our call is lower ASP occurring sooner than expected since the current elevated price is unlikely to be sustainable in the long term.

Source: Kenanga Research - 5 May 2021