Summary
2QFY24 CNP fell 49.4% yoy and 35.6% qoq bringing 6MFY24 CNP to RM22.5m (-12.4% yoy), accounting for only 37% of our full-year forecast as gross profit margin declined (-5.2ppts yoy) impacted by timing mismatches in material purchasing and delivery and smart automation machine installation, which temporarily affected production efficiency.
Trimmed FY25F/FY26F earnings by -22.7%/-5% after reducing gross profit margin assumptions by 2.5ppts/1.5ppts to factor in raw material price fluctuations.
Maintain BUY with a revised TP of RM1.41 (lowered P/E to 14.0x from 19.0x), advising investors to accumulate on weakness. Confidence in long-term prospects remains supported by capacity expansion and a decent dividend yield of ~5%.
Results fell short of expectations. Although revenue reached 57% of our full-year target, 6MFY24 core net profit of RM22.5m (-12.4% yoy) accounted for only 37% of our RM72.2m forecast. The shortfall primarily stemmed from lower production and a reduced gross profit margin, which was impacted by timing mismatches between materials purchasing and delivery. Despite this, the Group declared a second interim dividend of 1.0 sen per share, payable on 11 Apr 2025.
YoY. 2QFY24 core net profit fell by 49.4% yoy to RM8.8m, mainly due to a 5.2-percentage-point drop in the gross profit margin. This decline was attributed to fluctuations in rubber raw material prices during the quarter and timing mismatches between purchasing raw materials and recognizing revenue upon delivery to customers. Nevertheless, as the Group adopts a cost-plus pricing model, which may eventually result in higher average selling price (ASP) to be reflected in the subsequent period.
QoQ. Core net profit declined by 35.6%. Revenue inched up by just 0.6%, despite a 7.6% rise in the ASP, largely due to lower production and delivery volumes, as efficiency was hindered by the installation and tuning of the new smart automation manufacturing machine.
Outlook. We note that fluctuating rubber raw material prices may temporarily affect margins. However, prices have demonstrated relatively stable in recent months compared to 4QCY24, suggesting an expected rebound in upcoming quarterly earnings. While the ongoing installation of a smart processing automation machine in one factory may reduce production efficiency in the short term, overall production capacity should ultimately improve, contributing to higher earnings in the long run.
Earnings Revision. In light of the weaker-than-expected results, we have trimmed our forecasts by lowering our gross profit margin assumptions for FY25F and FY26F by 2.5% and 1.5%, respectively, to factor in raw material price fluctuations. Consequently, our core net profit forecasts have been revised downward by 22.7%/5% to RM55.8m/RM72.5m for FY25F/FY26F.
Valuation. We believe that the current weak market sentiment, fluctuating raw material prices, and the ongoing automation machine installation will result in short-term uncertainty to profitability margins. As a result, we are assigning a lower P/E multiple of 14.0x which is equivalent to -1 standard deviation from the 3-yr mean of the Bursa industrial index PER, down from our previous 19.0x. Nevertheless, we maintain our BUY recommendation with a target price of RM1.41, advising investors to accumulate on weakness. Our confidence in the Group’s long-term prospects remains underpinned by capacity expansion, and we view the stock as a defensive play during current weak market sentiment due to its stable quarterly dividend distribution, potentially offering a yield of approximately 5%.
Risk. Delays in capacity expansion plans and a longer-than-expected timeline for integrating Smart equipment into production, along with fluctuations in forex and commodity prices.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.390206 | 4.425718 |
| EUR | 5.008717 | 5.015095 |
| CNY | 0.603029 | 0.603828 |
| HKD | 0.565660 | 0.569770 |
| SGD | 3.345779 | 3.370205 |