1HFY22 PATAMI of RM136m (-94%YoY) came in at 58%/46% of our/consensus full-year forecast. In anticipation of softer ASP and lower-than-expected margins in subsequent quarters implying weaker QoQ earnings, we deemed the results as below expectation. Hence, we downgrade our FY22E/FY23E net profits by 16% each as we nudged down EBITDA margin from 16% to 14%. We also downgrade our TP from RM1.20 to RM1.03 based on 14x FY23E EPS, 33% discount to peers’ average to reflect its smaller market capitalisation after a 5% discount adjustment for a 2-star ESG rating as appraised by us. Reiterate UNDERPERFORM.

Key results’ highlights. QoQ, 2QFY22 revenue fell 15% due to lower ASP (-15%) and lower volume sales (-1%) from rubber gloves. EBITDA margin decreased by 6ppt from 22% in 1QFY22 to 16% in 2QFY22 due to lower ASP, and despite nitrile raw material cost declining by 50% - indicating lower absorption cost per unit. This brings 2QFY22 net profit to RM46m (-49%). No dividend was declared for the quarter as expected.

YoY, 1HFY22 revenue fell 71% due to lower ASP (-63%) and volume sales (-28%). As a result, 1HFY22 PATMI fell 94%.

Outlook. We expect ASP to remain in the doldrums in 2H 2022. As a result of massive capacity expansion by incumbent players as well as new players influx during the pandemic years — enticed by the then super fat margins that had eventually evaporated — we estimate that the global glove manufacturing capacity has jumped by 22% to 511b pieces in 2022 (see chart on the following page). On the other hand, as more countries come out the other end of the pandemic, we project the global demand for gloves to ease by 10% in 2022 to 387b pieces (partly also due to the destocking activities along the distribution network). This will result in an excess supply of 124b pieces (assuming, hypothetically, capacity utilisation is maximised). In 2023, we estimate that the global glove manufacturing capacity will surge by another 16% to 595b pieces (as more capacity planned during the pandemic years finally comes on-line) while the global demand for gloves shall resume its organic growth of 15% annually (taking our cue from MARGMA’s projection of 10-15% growth in global glove demand yearly), resulting in the excess supply rising further to 150b pieces. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

We downgrade our FY22E/FY23E net profit by 16% each as we nudged down EBITDA margin from 16% to 14%.

Maintain UP. We downgrade our TP from RM1.20 to RM1.03 based on 14x FY23E EPS, 33% discount to peers’ average to reflect its smaller market capitalization after imputing a 5% discount for a 2-star ESG rating as appraised by us.

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

Source: Kenanga Research - 27 Jul 2022