1QFY23 CORE PATAMI of RM88m (-96% YoY; -41% QoQ) came in at 24%/15% of our/consensus full-year forecasts. 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 FY23E net profit by 8% but keep our FY24E earning unchanged. TP is reduced from RM2.90 to RM2.80 based on 25x CY23E EPS in line with its bigger peers’ average. There is no adjustment to TP based on ESG of which it is given a 3-star rating as appraised by us. Reiterate MP.

YoY, 1QFY23 revenue fell 78%, due to lower ASP (-70%) and sales volume (-26%). EBITDA margin decreased by 51ppt to 23% from 74% in 1QFY22 due to lower ASP which fell faster than a corresponding decline in input raw material cost. This brings 1QFY23 core PATAMI lower by 96%, further exacerbated by a higher effective tax rate of 32% compared to 21% in 1QFY22. QoQ, 1QFY23 revenue fell 13% due to lower ASP (-13%) but negated by a higher volume sales (+8%). The higher sales we believe were attributed to back-logged orders from previous quarter due to logistic challenges such as capacity constraints on shipping vessels. No dividend was declared in 1QFY23. However, a final DPS of 3.50 sen was proposed for FY22, bringing FY22 DPS to 57.0 sen.

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 online) 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 ballooning further to 150b pieces. Based on our estimates, the demandsupply 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 lower our FY23E net profit by 8% as we reduced EBITDA margin from 18% to 17% but keep our FY24E numbers.

Reiterate MP. TP is reduced from RM2.90 to RM2.80 based on 25x CY23E EPS in line with its bigger peers’ average. There is no adjustment to TP based on ESG of which it is given a 3-star rating as appraised by us.

Risk to our call is lower-than-expected ASP.

Source: Kenanga Research - 10 Aug 2022