1QFY22 PATAMI of RM2,260m (+102% QoQ; +928% YoY) came in above expectations at 54%/59% of our/consensus full-year forecasts due to higher-than-expected volume sales. We raise our FY22E net profit by 3% after raising our volumes sales forecast. However, we lower FY23E net profit by 9% as we lower our utilisation rate estimate. We conservatively lowered our TP from RM13.80 to RM11.35 based on 13x CY22E EPS (at -1.0SD below 5-year forward historical mean). Reiterate OUTPERFORM.

Results’ review. QoQ, 1QFY22 revenue rose 70%, thanks to higher ASP (+13%) and higher-than-expected volume sales (+51%). EBITDA margin expanded by 4ppt from 70% in 4QFY21 to 74% in 1QFY22 due to higher ASP. This brings 1QFY22 PATAMI to RM2,260m (+102%). No dividend was declared in 1QFY22 as expected. However, on 6 July, a final FY21 DPS of 19.75 sen was declared. YoY, 1QFY22 PATAMI of RM2,260m was driven by a 3-fold surge in revenue underpinned by both higher ASP (+284%) and volume sales (+11%).

Outlook. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. With the ongoing MCO’s 60% restriction on workforce yet to be fully uplifted, plant utilisation is expected to be low and hence resulting in aggravated supply shortage to customers. However, management expect orders to creep up from Aug 2021 onwards and hence do not expect excessive downwards pricing pressure. Management has guided ASP to taper off by 30% in subsequent quarters. In our view, at current share price level, the weakness reflects an overly bearish reaction to the expected decline in ASP in subsequent quarters ahead. We highlight that management is of the view that ASP will likely normalise between USD30-35/1,000 pieces. Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness. According to Malaysian Rubber Glove Manufacturers Association, the demand surge for rubber gloves will last beyond 1Q 2022 with annual growth rate averaging between 15% and 20% going forward. To date, 8 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 January next year instead of earlier guidance in 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 raise our FY22E net profit by 3% after raising our volume sales growth from 7% to 10%. However, we lower our FY23E net profit by 9% as we conservatively lower our FY23E utilisation from 98% to 90%. Our FY23E ASP assumption remains pegged at USD40/1,000 pieces.

Reiterate OP. However, we conservatively lowered our TP from RM13.80 to RM11.35 based on 13x CY22E EPS (at -1.0SD below 5- year forward historical mean) (previously 15x). Our target PER is at a 50% discount to normalised 5-year pre-COVID-19 historical forward mean averaging 26-28x. 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. In our view, the current share price weakness reflects an overly bearish take on the expected decline in ASP in subsequent quarters ahead.

Risk to our call is lower ASP occurring sooner than expected.

Source: Kenanga Research - 4 Aug 2021