9MFY22 PATAMI of RM3,433m (+94% YoY) came in below expectations, at 91%/96% of our/consensus full-year forecasts. The variance is due to the anticipated one-off prosperity tax in FY22 from Budget 2022. We lower our FY22E/FY23E net profit by 6%/8% after taking into imputing higher effective tax rate in FY22 and lowering ASP and margin in FY23. TP is reduced from RM7.50 to RM7.00 based on unchanged 17x CY22E revised EPS. Reiterate OUTPERFORM.

QoQ, 3QFY22 revenue fell 50%, no thanks to lower ASP (-40%) and volume sales (-17%). The lower sales were attributed to customers continuing to adjust inventories due to declining ASP coupled with logistic challenges such as capacity constraints on shipping vessels. EBITDA margin decreased by 24ppt from 61% in 2QFY22 to 37% in 3QFY22 due to lower ASP which fell faster than a corresponding decline in input raw material cost. This brings 3QFY22 PATAMI to RM259m (-72%). A 2nd interim DPS of 14.80 sen was declared bringing 9MFY22 DPS to 50.0 sen which came in below our expectation. YTD, 9MFY22 PATAMI of RM3,433m was driven by a 57% surge in revenue, underpinned by higher ASP (+99%) which more than offset lower volume sales (-21%).

Outlook. In the 3QFY22 results briefing, management highlighted that there are back-logged orders yet to be delivered; hence, not captured in 3QFY22 sales due to shipping delay. The group expect utilisation to hover between 65% and 75% as they expect uptick in orders. The 3QFY22 utilisation rate of 55% was largely due to delay in shipment caused by vessels constraints and we expect the one-off additional prosperity tax, to the tune of RM300-RM400m, to hit its 4QFY22 earnings. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. In line with the growing rubber glove demand globally, the Group will continue to expand capacity in NGC, Sepang. To date, 8 out of 9 lines in Plant 7 have been commissioned. Upon full commissioning, Plant 7 will have an annual installed capacity of 2.6b pieces. The construction for the upcoming expansion under NGC 1.5, is currently underway and the Group targets to commission the first line by October 2022. NGC 1.5 will house 4 additional production plants which will contribute 19b pieces to the annual installed capacity. With the completion of NGC 1.5, the Group’s annual installed capacity will increase to 63b pieces per annum.

We lower our FY22E/FY23E net profit by 6%/8%. We lower our FY22E net profit by 6% after imputing higher effective tax rate of 30%, compared to 26% previously, taking into account the one-off prosperity tax in Budget 2022. We downgrade our FY23E net profit by 8% taking into account: (i) ASP reduced from USD27 to USD26 per 1,000 pieces and (ii) EBITDA margin from 23% to 22%.

Reiterate OP. TP is reduced from RM7.50 to RM7.00 based on unchanged 17x CY22E revised 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 - 9 Feb 2022