1QFY22 Core PATAMI of RM90m (-59% QoQ; -91% YoY) came in at 28%/27% of our/consensus full-year forecast. Despite 1QFY22 results coming in line; in anticipation of lower ASP in subsequent quarters and lower-than-expected margins implying lower QoQ earnings ahead, we deemed the results as below expectation. We downgrade our FY22E/FY23E net profit by 7% each as we nudged down EBITDA margin from 19% to 18%. Our TP is lowered from RM1.65 to RM1.60 based on 13x FY23E EPS (at -0.5SD below 5-year pre-COVID forward historical mean of 17x). Reiterate UNDERPERFORM.

Key results’ highlights. QoQ, 1QFY22 revenue fell 25% due to lower ASP (-25%) and lower volume sales (-5 to -10%) from rubber gloves. EBITDA margin decreased by 10ppt from 32% in 4QFY21 to 22% in 1QFY22 due to lower ASP despite cost of nitrile raw material cost declining by 30% - indicating lower absorption cost per unit. This brings 1QFY22 core net profit to RM90m (-59%). No dividend was declared in this quarter as expected. YoY, 1QFY22 revenue fell 69% due to lower ASP (-35 to -40%) and volume sales (-22 to -27%).

Outlook. The group highlighted that the performance in the quarter was also affected by logistic challenges caused by the global shipping container shortages of which we understand are unlikely to abate over the next two quarters. In the meantime, margins in subsequent quarters could be impacted as raw material cost is not adjusting as fast as falling ASP and hence earnings is expected to be lower sequentially. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. In the meantime, the planned capacity expansion over the next two years are as follows:- (i) a piece of land in Meru located adjacent to one of its current plants is earmarked for a single plant with 5b pieces capacity to be completed in two phases i.e. Phase 1 – 6 lines, 2b pieces and Phase 2 – 10 lines, 3b pieces commencing in 1H 2022, and (ii) 12 lines with 4b pieces capacity to fully commission in 2H 2022 in Bidor. Upon completion, these three new plants will bring the group’s total installed capacity from 32b to 42.4b (+33%) pieces of gloves per annum.

We downgrade our FY22E/FY23E net profit by 7% each as we nudged down EBITDA margin from 19% to 18%.

Maintain UP. Our TP is lowered from RM1.65 to RM1.60 based on 13x FY23E EPS (at -0.5SD below 5-year pre-COVID forward historical mean of 17x). We roll over our valuation base from FY22E to FY23E. Reiterate UP.

Key risk to our call is stronger-than-expected ASP.

Source: Kenanga Research - 28 Apr 2022