9MFY22 net profit came in at RM288.6m (-96% YoY) which is below expectations at 55%/54% of our/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 40%/37%. TP is also lowered from RM1.30 to RM0.95 based on 22x FY23E EPS, 30% premium to peers’ average largely to reflect its bigger market capitalisation. Reiterate UP.

QoQ, 3QFY22 revenue fell 1% due to lower ASP (-7%) but negated by higher volume sales (+6%). QoQ sales volume was higher as sales to US rose 8%. EBITDA margin fell 5ppt to 9% from 14% due to higher production cost such as electricity tariff (+17% since Feb 2022), natural gas (+3.5% since April 2022) and raw material price not adjusting down as fast as the falling ASP, and aggravated by the reduced economies of scale arising from volume output that is less than optimum on the back of the soft demand. QoQ, 3QFY22 average natural latex price rose 17% to RM6.50/kg due to the wintering season, whilst nitrile latex price fell 3%. This brings 3QFY22 PATAMI to RM15m (-83%) further dragged down by higher effective tax rate of 24% vs. 9% in 2QFY22. A 1st interim dividend of 1.2 sen was declared which came in below our expectation. YoY, 9MFY22 revenue fell 69% due to lower ASP (-61%) and volume sales (-25%). This propelled 9MFY22 PATAMI lower by 96%.

Outlook. Key takeaways from the post-results conference call are as follow:- (i) the group is unable to fully pass on the cost increase due to the current oversupply situation which is expected to remain challenging; (ii) apart from educed economies of scale arising from volume that is less than optimum on the back of the soft demand evident from the low utilisation rate, gloves players are experiencing margins erosion as raw materials costs are not adjusting down as fast as ASP; (iii) management highlighted that ASP over the short to medium term could be lower than pre-pandemic level due to the current supply- demand imbalance but sees margins near bottom; (iv) current industry utilisation rate of 50-60% is expected to put brakes on excessive new capacity of which in our view is expected to put some near-term pressure on ASP; and (v) in terms of M&A – the group have been approached by potential sellers but don’t see urgency given excess capacity. We expect margins in subsequent quarters to be remain low due to the sustained high production cost and low utilisation rate leading to inability to fully pass cost through. In consideration of the moderating demand, the Group has deferred and reduced its major CAPEX for the immediate term, as it continues to align its expansion plans with market conditions.

Our FY22E/FY23E net profits are downgraded by 40%/37% as follow; (i) FY22E – reduce EBTDA margin to 13% from 15%, ASP lowered to USD23 from USD25 per 1,000 pieces and utilisation from 65% to 60%; and (ii) FY23E – cut EBITDA margin assumption to 13% from 18%, ASP reduced to USD22 from USD24 per 1,000 pieces.

Reiterate UP. Correspondingly, we downgrade our TP from RM1.30 to RM0.95 based on 22x FY23E EPS, at 30% premium to peers average of 17x largely to reflect its bigger market capitalisation.

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

Source: Kenanga Research - 10 Jun 2022