1HFY22 PATAMI of RM3,174m (+315% YoY) came in line with expectations, at 82% each of our and consensus full-year forecasts. However, due to the anticipated one-off prosperity tax in FY22 from the recently announced Budget 2022, we lower our FY22E net profit by 4%. We maintain our FY23E earnings estimate. TP is slightly reduced from RM8.85 to RM8.70 based on unchanged 16x CY22E EPS. Reiterate OUTPERFORM.

QoQ, 2QFY22 revenue fell 49%, no thanks to lower ASP (-27%) and volume sales (-34%). The lower volume sales were due to the Enhanced Movement Control Order (EMCO) in July 2021 when its plants operated at only 60% workforce following the National Recovery Plan (NRP). EBITDA margin decreased by 13ppt from 74% in 1QFY22 to 61% in 2QFY22 due to lower ASP which fell faster than a corresponding decline input raw material cost. This brings 2QFY22 PATAMI to RM914m (-60%). A 1st interim DPS of 35.2 sen was declared which came in below our expectation.

YTD, 1HFY22 PATAMI of RM3,174m was driven by a 161% surge in revenue underpinned by higher ASP (+>100%) which more than offset lower volume sales (-11%).

Outlook. In the 2QFY22 briefing, management expects demand to start surging in Jan 2022 with uptick in demand evident from Oct 2021 and sees utilisation rate back up to 70-80% compared to 60-70% currently. The recent round of reporting season for glove makers suggested that the ASP trend is expected to soften faster than expected in subsequent quarters. Since ASPs are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. We believe this signals acceleration in overall market ASP normalization. We are unable to quantify as to how low ASP will fall to; however, glove manufacturers are of the view that ASP is unlikely to go below pre-COVID pricing considering that the cost structure has risen amongst others including social compliance costs and the high nitrile feedstock cost compared to pre-COVID era. Post COVID-19 and/or lower ASP, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and higher hygiene awareness. 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 April 2022 instead of the earlier guidance in January 2022. 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 4% after imputing higher effective tax rate of 26% compared to 22% previously, taking into account the one-off prosperity tax in the recently announced Budget 2022. No change to our FY23E earnings forecast.

Reiterate OP. TP is slightly reduced from RM8.85 to RM8.70 based on unchanged 16x CY22E EPS (at discount to 5-year pre-COVID forward historical mean of 26-28x). Since ASPs are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped.

Risk to our call is lower-than-expected ASP.

Source: Kenanga Research - 3 Nov 2021