FY21 PATAMI of RM3,813m (+6-fold YoY) came in within expectations at 99%/96% of our/consensus forecasts. In our view, the current share price weakness reflects an overly bearish take on the expected decline in ASP in subsequent quarters ahead. We conservatively downgrade our FY23E net profit by 26% after imputing slightly lower ASP. Our FY22E ASP remains at USD48/1,000 pieces. Correspondingly, we downgrade our TP from RM6.49 to RM5.00 based on 9x CY22E EPS. Reiterate OP.

Key results’ highlights. QoQ, 4QFY21 revenue fell 3%, no thanks to lower ASP and we believe on lower volume sales as well due to production loss arising from MCO’s 60% restriction on workforce. EBITDA margin fell 3.6ppt to 66.8% from 70.4% due to a lower ASP. This brings 3QFY21PATAMI to RM959m (-5%) due to higher effective tax rate of 18% compared to 24% in 3QFY21. A special dividend of 15.0 sen was declared bringing FY21 DPS to 31.8 sen which came in line with our expectation. YoY, FY21 PATAMI rose 6-fold to RM3,813m due to revenue growth (+236%), boosted by higher ASP.

Outlook. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. The group highlighted in the quarterly result note that global glove prices have since dropped following the rollout of Covid-19 vaccines but does not expect glove ASPs to drop sharply due to the structural change in glove consumption from new customer segments. Net cash as at 30 June 2021 stood at RM3.5b or RM1.29/share. 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. The lead times suggest that CY22 demand will remain strong. Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness. Plant 12 Block B (total 4.4b pieces) have been completed following the commissioning of the remaining lines adding 2.2b pieces, elevating total installed capacity to 26.2b (+13.4%).It is concurrently building five glove manufacturing plants, scheduled for completion progressively which will add 22.3b pieces in new capacity and raising total capacity to 48b pieces.

Downgrade FY23E net profit by 26% after imputing slightly lower ASP from USD35/1,000 to USD30/1,000 pieces. Our FY22E ASP remains at USD48/1,000 pieces.

Reiterate OP. Correspondingly, we downgrade our TP from RM6.49 to RM5.00 based on 9xCY22E revised EPS of 55.6 sen (-1.0SD below 5-year forward historical mean). We reduce PER from 10.5x to 9x to account for a 10% operating risk discount. 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. In our view, the current share price weakness reflects an overly bearish take on the expected decline in ASP in subsequent quarters ahead.

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

Source: Kenanga Research - 27 Aug 2021