2QFY21 CNP of RM13.3m led 1HFY21 to RM52.8m – below expectations on: (i) weaker-than-expected glove contributions in 2QFY21, and (ii) weaker glove earnings prospects for 2HFY21 given the fast deteriorating ASPs. Meanwhile, 1HFY21 sales of RM801m were inline. Cut earnings by 27%/23% after reducing FY21E/FY22E ASPs by 18%/22% to USD45/USD35 per 1,000 pieces. Downgrade to MP (from OP) with lower SoP-TP of RM0.85 (from RM1.05) anchored to lowered glove segment’s PER of 7x (from 10x).

Below expectations. 2QFY21 CNP of RM13.3m led 1HFY21 CNP to RM52.8m – below our/consensus expectations at 29%/26% of full-year estimates, respectively. The earnings came in short due to: (i) weaker than-expected maiden contributions from its glove division on lower volumes in 2QFY21, and (ii) fast deteriorating ASPs against our full-year assumption of USD55/1,000 pieces thwarting our initial expectation of a strong rebound in 2HFY21. Our channel checks reveal that ASPs for delivery in Sept 2021 are at low (USD) 50s while ASPs for delivery in Oct 2021 are at low 40s. No dividends declared as expected.

Sales inline. Meanwhile, 2QFY21 sales of RM401m led 1HFY21 sales to RM801m – in line with our/management’s target of RM1.5b/RM1.6b. These sales were backed by launches worth RM0.8b in 1HFY21 and management targets another RM0.8b launches for the remainder of FY21. Meanwhile, YTD sales (as of 8MFY21) stood healthily at RM1.01b despite the multiple lockdowns implemented since June 2021.

Highlights. 2QFY21 CNP of RM13.3m decreased 66% QoQ, mainly due to the RM27.5m perpetual securities payment payable every 2Q and 4Q. Without such payment, earnings would actually come in flat despite the FMCO in June as all of Mahsing’s sites were allowed to operate at 60% capacity thanks to the CLQs (centralised labour quarters) being set up on each site. We note that the revenue contributions from its maiden gloves division in 2QFY21 were RM8m at max* while bottom-line was at a loss due to start-up costs incurred. YoY, 1HFY21 CNP leapt 2.7x on higher revenue (+27%) as 1HFY20 was bogged down by a stricter MCO1.0.

*Gloves contributions were bundled into “investment and others” segment which also encapsulates earnings derived from interests from deposits and trading of building materials.

Outlook. Due to the lockdowns imposed beginning June 2021 which hampered construction; completion target of its 12 glove lines has been postponed by two months from September to November. Coupled with the EMCO (3rd July – 16th July) which restricted production of gloves, the total number of gloves targeted to be produced in FY21 is now lower at 1.1b pieces (vs 2.0b pieces previously).

Reduce FY21E/FY22E earnings by 27%/23% after pencilling in lower glove ASPs of USD45/1,000 pieces and USD35/1,000 pieces (from USD55 and USD40 per 1000 pieces), respectively. In our earnings breakdown, the glove division now contributes RM33m in FY21 and RM58m in FY22 (vs. RM84m and RM116m, previously).

Downgrade to MP (from OP) with lower SoP-TP of RM0.85 (RM1.05) after pegging glove earnings assumption to a lower FY22E PER of 7x (from 10x). Given Mahsing’s smaller production capacity coupled with its fresh entry into the glove space, our 7x targeted valuation is considered fair as it is at a discount against valuations ascribed to the big four glove manufacturers (Topglove, Harta, Supermx and Kossan) under our coverage of 9-13x Fwd. PER.

Source: Kenanga Research - 1 Sept 2021