• Keep NEUTRAL, higher MYR0.74 TP from MYR0.65 based on unchanged P/E of 15.5x on FY21 EPS of 4.8 sen, -9% expected total return. 1H20 core net profit was a positive surprise on improved manufacturing segment margins and a rebound in IDR exchange rate in 2Q. Post results, FY20F-22F bottomlines are revised up by between 3-13% to reflect TMSB’s enlarged production capacity just in time to meet higher demand from the glove manufacturing sector – which we think will offset some of the weakness in the UPR segment.

• Better-than-expected set of results. While 1H20 revenue met our expectations at MYR315m, it fell 19% YoY due to COVID-19. However, a positive surprise came at the core net profit level, which fell only 10% to MYR17.6m as a result of a better blended net margin of 5.3% vs 4.9% in 1H19. This was due to the manufacturing segment’s higher margin contribution of 25% which offset the trading segment’s weaker margin of 3.3% vs 4.0% in 1H19. The manufacturing segment’s improved margin was attributed to higher margin contribution from Transform Master (TMSB), its subsidiary which supplies chemicals to the glove manufacturing segment. This offset the weakness in the unsaturated polyester resin (UPR) manufacturing segment. An interim DPS of 1 sen was declared.

• TMSB completed another round of capacity expansion. Due to higher demand from the glove manufacturing sector, TMSB has fully utilised its capacity – utilisation was c.80% in the previous year. To meet the higher demand, TMSB successfully increased its capacity to 2k tonnes per month in July (previously 1.5k tonnes per month). The timing was good to capture the sudden spike in demand from the glove sector, which is also currently experiencing capacity build-up.

• Earnings revised higher. We revised FY20F-22F earnings higher by 12%, 13% and 3%. This largely reflects our expectation that the better demand from the glove sector would likely offset the slower demand and margin for its UPR manufacturing segment. The UPR segment is exposed to a downward swing in industry demand amidst slower economy activities and keener pricing pressure due to high industry capacity.

• Better trading opportunity at lower price level. While we continue to like the company, we think the current valuation of 18x of FY21 EPS is on the high side, considering that it is not a pure glove play. Better trading opportunities should emerge at a price level of c.MYR0.63-MYR0.65.

• Risks. Upside risks are a sharp V-shaped recovery in demand for its UPR products, better-than-expected margins and further strengthening of the USD/MYR rate. Downside risks are a contraction in product margins and further depreciation of the IDR vs MYR.

Source: RHB Securities Research - 30 Jul 2020