1QFY22 net profit came in at RM186m (-59% QoQ, -92% YoY) which is below expectations at 9%/11% of our/consensus full- year forecasts due to lower-than-expected volume sales and lower-than-expected margins as input raw material cost fell slower than the sharper fall in ASP. This prompted us to cut our FY22E/FY23E net profit by 55%/48%. TP is also lowered from RM3.60 to RM2.05 based on 18x CY22E EPS at pre-COVID 5- year forward historical mean. Downgrade from OP to MP.

QoQ, 1QFY22 revenue fell 25% due to lower ASP (-17% to -37%) and volume sales (-0.4%). The lower QoQ sales volume was due to lower utilisation rate as customers were adopting a ‘wait and see’ approach in anticipation of normalizing ASPs and absence of restocking activities. EBITDA margin fell 12ppt to 22% from 34% due to raw material price not adjusting down as fast as the falling ASP and higher average cost due to production disruption from the pandemic. QoQ, 1QFY22 average natural latex price fell by 8% to RM5.09/kg, whilst nitrile latex price fell 19% to USD1.79/kg. This brings 1QFY22 PATAMI to RM186m (-59%). A 1st interim dividend of 1.2 sen was declared, below our estimate due to the poorer-than-expected results. YoY, 1QFY22 revenue fell 67% due to lower ASP (-50%) and volume sales (-34%). This propelled 1QFY22 PATAMI lower by 92%.

Outlook. Key takeaways form the post-results conference call are as follow:- (i) management expects ASP to normalise in 1HFY22 with nitrile margin is presently at pre-COVID level but latex is still above pre- COVID; (ii) the group expects utilisation to move up to above 55% from 1QFY22 on the back of restocking and higher usage from economy reopening and expect a 10% increase in volume sales in 2QFY22; (iii) the group expect input nitrile raw material is expected to trend down by an estimated 40% in Jan 2022 which should lend support to margins; and (iv) management is confident of 10%-15% gloves demand growth per annum compared to pre-COVID of 8% due to the increased awareness of hygiene standard. Due to over-ordering in the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness. Recap, plans for a dual primary listing in which it will issue up to 793m new shares via a global offering on the Main Board of The Stock Exchange of Hong Kong Limited (HKEX) is expected to enlarge share base by 9%. The listing is expected to be completed in end 1Q 2022 and dilute EPS by an estimated 9%.

Our FY22E/FY23E net profits are downgraded by 55%/48% as follow; (i) FY22E – reduce EBTDA margin to 19% from 28%, ASP lowered to USD30 from USD32, volume growth cut to 11% from 28% and imputing higher effective tax rate of 28% compared to 20% previously, imputing the one-off prosperity tax; and (ii) FY23E – cut EBITDA margin assumption to 18% from 25%, ASP reduced to USD28 from USD29 and volume sales growth to 13% from 24%.

Downgrade from OP to MP. Correspondingly, we downgrade our TP from RM3.60 to RM2.05 based on 18x CY22E EPS of 11.3 sen (at pre- COVID 5-year forward historical mean). The HKEX listing could dilute EPS and hence could further lowered our TP.

A key downside risk to our call and TP is lower-than-expected margin.

Source: Kenanga Research - 13 Dec 2021