Adventa -Worst over

Price: RM1.14
Target Price: RM1.48
Recommendation: BUY

· 2Q09 results were mainly within expectations. 6M09 revenue of RM135.4m came in at 47.4% of our expectations while net at RM7m was only 40.6%. The slight underperformance at the net was mainly due to forex hedging losses which amounted to RM8.6m for the 6M09 without which the numbers would have far exceeded our initial forecast.

· QoQ, revenue was flat with 2Q09 revenue down 1.3%. With capacity utilization of its 2.2b Malaysian capacity very much maxed out in the near term, the group was therefore unable to capitalize immensely from the recent surge in demand as a result of the flu pandemic. GP margins however moved up 12 basis points to 23.4% as a result of lower input prices and continuous cost containment exercises.

· YoY, revenue was up 11.8% but net was down 35.9% mainly as a result of the RM8.6m in hedging losses. Normalised, bottomline could have improved by a substantial 42% on the back of a near 12% improvement in topline performance.

· Worst had been seen. Management is confident that the worst is behind with the currency hedge likely to have run its course by the end of FY09. While there remains to have some lingering impact still for the next two quarters, the impact at the absolute is likely to be much lesser compare to the first 6 months of the year.

· Demand remains robust with new products gaining traction across the globe. As a result, management is earmarking another new expansion in Kluang with another 2.5 billion pieces (83% increase) capacity dedicated to producing synthetic medical gloves. Capital expenditure of RM15m – RM20m had been budgeted with capacity likely to come on line by the 2nd quarter 2010.

· Forecast is lowered but target price is raised to RM1.48. We are lowering our FY09 net profit by 10% taking into account a higher than expected hedging losses. We are also lowering our FY10 numbers by 7.9% as we factor in higher interest expenses which we had been conservative previously. As we introduce our FY11 numbers and roll over valuation to CY10, a new target price of RM1.48 is derived based on 8x earnings. BUY maintained.