1HFY22 net profit came in at RM273m (-95% YoY) which is below expectations at 30% each of our and consensus full- year forecasts, due to lower-than-expected margins as input raw material cost fell slower than the sharper fall in ASP. This prompts us to cut our FY22E/FY23E net profit by 44%/39%. TP is also lowered from RM2.05 to RM1.30 based on 19x FY23E EPS at pre-COVID 5-year forward historical mean. Downgrade from MP to UP.

QoQ, 2QFY22 revenue fell 9% due to lower ASP (-18%) but negated by higher volume sales (+10%). The higher QoQ sales volume was due to higher sales to US by 120%, and customers commencing restocking as ASPs stabilised towards pre-pandemic levels. EBITDA margin fell 8ppt to 14% from 22% 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, 2QFY22 average natural latex price rose 10% to RM5.57/kg due to the wintering season, whilst nitrile latex price fell 36% to USD1.15/kg. This brings 2QFY22 PATAMI to RM88m (-53%) boosted by a lower effective tax rate of 9% compared to 22% in 1QFY22. Since dividend payment is revert back to semi-annually, no dividend was declared in this quarter. YoY, 1HFY22 revenue fell 70% due to lower ASP (-59%) and volume sales (-28%). This propelled 1HFY22 PATAMI lower by 95%.

Outlook. Key takeaways from the post-results conference call are as follow:- (i) management expects ASP to bottom out in another 1-2 quarters with higher latex ASP (+5%) in Mar 2022 due to higher input raw material cost and oversupply to last between six to nine months; (ii) the group could also be impacted by logistic challenges caused by the global shipping container shortage of which we understand are unlikely to abate over the next two quarters; (iii) management expect better volume sales ahead as customers are more willing to ‘restock’ given ASP stabilisation and more normalised stock levels; (iv) following the uplifting of the US CBP ban, the group managed to recover 80% of sales to the US; and (v) we expect margins in subsequent quarters to be impacted as raw material cost is not adjusting as fast as falling ASP and hence earnings could be lower sequentially which depends on the cost- pass through mechanism. 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 via a global offering on the Main Board of The Stock Exchange of Hong Kong Limited (HKEX) has been shelved.

Our FY22E/FY23E net profits are downgraded by 44%/39% as follow; (i) FY22E – reduce EBTDA margin to 15% from 19%, ASP lowered to USD25 from USD30 per 1,000 pieces; and (ii) FY23E – cut EBITDA margin assumption to 15% from 18%, ASP reduced to USD24 from USD28 per 1,000 pieces.

Downgrade from MP to UP. Correspondingly, we downgrade our TP from RM2.05 to RM1.30 based on 19x FY23E EPS (at pre-COVID 5- year forward historical mean). We roll over our valuation from CY22E to FY23E. Downgrade from MARKET PERFORM to UNDERPERFORM.

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

Source: Kenanga Research - 10 Mar 2022