9MFY25 CNP of RM31.7m (-22.4% yoy) after reported RM9.2m CNP in 3QFY25 came in below expectations, accounting for only 57% of our RM55.8m full-year forecast, despite revenue reaching 76%. The shortfall was due to GP margin compression from raw material cost timing mismatches amid elevated rubber prices. Declared a 1.0 sen quarterly dividend.
We cut FY25F/FY26F earnings by -18%/-16% on lower GP margin and ASP assumptions, reflecting weaker near-term margin outlook and global trade-linked pricing volatility.
Maintain BUY with a lower TP of RM1.19 (from RM1.41) based on 14.0x PER, advising accumulation on weakness. We remain confident in long-term growth, backed by capacity expansion and automation, and view the stock as a defensive yield play (~5% dividend yield) in a volatile market.
CNP fell short of expectations. While revenue reached 76% of our full-year forecast which in line with expectations, 9MFY25 CNP of RM31.7m (-22.4% yoy) accounted for only 57% of our RM55.8m estimate, falling below expectations. The shortfall was mainly due to a reduction in GP margin, impacted by timing mismatches between raw material purchases and delivery, as rubber prices were elevated during the quarter under review. Despite this, the Group maintained its quarterly dividend distribution, declaring a 1.0 sen payout during the period.
YoY. 3QFY25 CNP declined 39.4% yoy to RM9.2m, largely due to a 5.7ppt drop in GP margin. The decline was attributed to volatile rubber raw material prices and mismatches in the timing of material purchases and revenue recognition upon delivery. Nonetheless, as the Group adopts a cost-plus pricing model, the higher ASP will be reflected in the subsequent quarter.
QoQ. CNP recovered by 4.1% qoq, while revenue rose 9.9% qoq, supported by a 10.3% increase in ASP to RM9,039/MTS. However, sales volume remained flat at ~44k MTS, which was lower than the peak level of 47k MTS, due to fewer production days during the quarter. The shorter operational period, caused by Chinese New Year, Hari Raya, and lower working days in Feb 2025, is estimated to have resulted in a volume shortfall of approximately 3k MTS.
Outlook. We note that fluctuating rubber raw material prices and timing mismatch may continue to temporarily impact profit margins. However, we expect strong rebound of margins in the next quarter, as high ASPs will be realised, while raw material prices (TSR) dropped ~16% in Apr 2025 due to uncertainties surrounding US trade policies. While lower rubber prices may affect ASP for long-term average contract customers, the anticipated recovery in sales volume to 47k MTS in the next quarter should help cushion the impact. According to our channel checks, demand remains robust, particularly from China’s resilient automotive exports. The installed smart processing automation machine at one plant is running smoothly, and management is planning to install the next unit soon, which should enhance overall productivity and efficiency. This is expected to drive long-term capacity improvements and earnings growth.
Earnings Revision. Following the weaker than expected results, we have lowered our gross profit margin assumptions by 1% and 0.5% for FY25F and FY26F, respectively. We have also revised down our FY26F ASP assumption from RM8,100 to RM7,600 to reflect raw material price volatility linked to global trade uncertainty. As a result, our net earnings forecasts for FY25F and FY26F have been reduced by 18% and 16% to RM45.6m and RM60.9m respectively.
Valuation. Following the earnings downgrade, we have revised our target price lower to RM1.19 (from RM1.41 previously), based on an unchanged P/E multiple of 14x. We maintain our BUY recommendation, advising investors to accumulate on weakness. Despite the volatility in rubber prices, we remain confident in the company’s long-term prospects, underpinned by its capacity expansion plans. We also view the stock as a defensive play amid current market uncertainty, supported by its quarterly dividend distribution, offering an attractive yield of approximately 5%.
Risks. 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 | 4.214000 | 4.246402 |
| EUR | 4.933065 | 4.941517 |
| CNY | 0.592554 | 0.593580 |
| HKD | 0.540322 | 0.544498 |
| SGD | 3.273088 | 3.298512 |