Highlights

UOB Kay Hian Research Articles

Author: UOBKayHian   |   Latest post: Thu, 18 Oct 2018, 1:08 PM

 

Top Glove - Torpedoing Into the FBM-KLCI?

Author: UOBKayHian   |  Publish date: Thu, 18 Oct 2018, 1:08 PM


  • There were no major surprises from the briefing yesterday. However, we note that Top Glove stands a high chance of being admitted into the FBMKLCI. Based on recent trends, we acknowledge that an inclusion may help to book alpha. That said, we caution this is not a fundamentally driven price movement.
  • Regardless, our new valuation has pencilled in a partial re-rating to capture this event but downside risks still prevail.
  • Maintain SELL with a revised target price of RM10.00 (from RM8.20).

What’s New

Post-briefing key takeaways.

Top Glove held a results briefing yesterday, and similar to the past, it was well attended by various stakeholders. 

There were no major surprises from the briefing as discussions revolved mainly around FY18 operational review and re-iterating its outlook. Key takeaways include:

  1. emerging markets continued to spur overall volume growth,
  2. unveiling its expansion plans over the next 1-2 years, and
  3. an explanation on why there was no goodwill impairment charged on Aspion.

Potential inclusion into the FBMKLCI.

Recall that there are two key criteria to be met before a stock can be admitted into the FBMKLCI:

  1. market cap ranking, and
  2. share turnover in issue of at least 0.05% for more than 9x in the 12 months preceding the semi-annual review (SAR).

Assuming last Friday’s data was unchanged till appraisal time, we find that Top Glove has a strong chance for inclusion, replacing Telekom Malaysia by virtue of the latter falling to the 36th spot, and scoring a perfect 12/12 for the liquidity test.

Three important dates to take note of are:

  1. 26 November for data assessment,
  2. 6 December for results announcement, and
  3. 24 December for effective inclusion/exclusion from the index

Stock Impact

Emerging markets driving volume growth.

We understand that a large proportion (72%) of the robust demand (26% volume growth) seen in FY18 came from emerging markets: Asia ex-Japan (volume: +58% y-o-y), Eastern Europe (+40% y-o-y), and Middle East (+39% y-o-y). Product appetite in these regions was skewed towards those made from natural rubber (powder free +24% y-o-y, powdered +23% y-o-y), fuelled by rising healthcare awareness and spillover effect from the shortage of global vinyl gloves; the segment makes up 47% of total volume growth.

However, developed areas such as North America (2% y-o-y) saw much slower volume growth due to the market maturity combined with a more competitive operating environment, but Western Europe saw good sales fraction (+36% y-o-y).

Unveiling its new expansion plans.

With the acquisition of Aspion completed in early-April along with the completion of Factory 31 in July, Top Glove is now capable of producing up to 60.5b gloves p.a.. Also, management unveiled its new expansion plans (Factory 33, 5A and 8A) to the investment community on top of the outstanding expansion timeline for Factory 32 (by end-19). When all are fully operational by 2020, Top Glove’s enlarged manufacturing capacity will balloon to 70.3b gloves p.a. (+16%).

The new lines are for nitrile gloves, which should raise capacity mix in this space to about 40% from 35% currently. Management intends to achieve a 50:50 nitrile-to-latex glove production split over the longer term.

Explanation for no impairment charge.

Although the RM1.2b goodwill on its book is created from the purchase of Aspion, management explained there is an underlying difference between its impairment test vs the RM640m overvaluation amount they are seeking from the vendors.

Essentially, the impairment test is based on conservative discounted cash flow (DCF) method with a zero terminal growth rate as compared with the original acquisition price tag, which was based on PE multiplier model.

The argument is that the financial projections used in the impairment test accounted for the enhancement to Aspion’s glove production process. Hence, this requires input and effort from Top Glove. Only then can it match the sort of profit estimates initially guided by the vendors of Aspion in 4-7 years’ time.

Lesser impairment risk moving forward.

With the conservative DCF parameters used for the recent impairment testing, this reduces the risk of a negative charge in the near term as long as Top Glove is able to meet its own financial forecasts.

We gathered that management is looking at FY19-23 net profit range of RM40m-65m, which is below the earlier profit guarantee of RM80m.

Similarly, we have built in comparable earnings contribution from Aspion of RM40m-RM50m over the next three years in our financial model. Besides, the outcome of the on-going litigation should not be affected as it is a separate matter altogether.

Earnings Revision / Risk

No change to our forecasts. 

Key upside risks include:

  1. recovering the RM640m from Adventa Capital,
  2. market share gains,
  3. more bona fide sizeable value-accretive M&As, and
  4. US dollar appreciating markedly vs the ringgit.

Valuation / Recommendation

Maintain SELL but with a revised target price of RM10.00 (from RM8.20) as we peg the stock to a higher 2019F PE multiple of 22x (from 18x). This is +1SD above its 5-year forward mean PE of 16x but below the sector’s 27x.

The premium is fair as:

  1. Top Glove has been making steady headway into the generally faster-growing nitrile glove space, and
  2. despite the negative development at Aspion, the group is still touted as the no.1 surgical glove player globally.

That said, the discount to the glove sector is warranted, considering its relatively stretched balance sheet (net gearing of 0.9x vs peers' average of 0.1x).

The primary reason for the valuation bump-up is to capture a partial re-rating from the potential inclusion into FBMKLCI. We note that after Nestle and Press Metal were included into FBMKLCI, both stocks generated commendable returns of 12-32% over a short three months.

While we acknowledge post-index inclusion may help to create alpha, we caution that this is not a fundamentally driven price movement. Further, there were no major structural business developments and valuations remained rich. Hence, should Top Glove become a FBMKLCI component in December, we advise investors to sell on strength.

Post-bonus issue, our target price would be RM5.00, excluding the potential dilution from full guaranteed exchangeable bonds conversion into new Top Glove shares pending more details of the exercise.

Source: UOB Kay Hian Research - 18 Oct 2018

Labels: TOPGLOV

Top Glove - 4QFY18 Weaker-Than-Expected Earnings; Priced to Perfection

Author: UOBKayHian   |  Publish date: Mon, 15 Oct 2018, 11:09 AM


  • Top Glove’s 4QFY18 core earnings decelerated 9% q-o-q, mainly due to higher raw material, interest and tax costs. Also, forward orders remained softer than 10 months ago.
  • We stay bearish on the stock as valuations are rich and risk-reward profile is unfavourable.
  • Within our coverage, Top Glove is the second priciest proxy to the sector. Also, it is trading at more than +2SD its five-year forward PE.
  • Maintain SELL and target price of RM8.20.

Results

Weaker than expected.

  • Top Glove’s 4QFY18 core earnings fell 9% q-o-q (but up 26% y-o-y) vs our earlier expectation of a q-o-q improvement. This brought FY18 bottom-line to RM448m (+39% y-o-y), which was at the lower end of our expectations, making up 96% and 100% of our and the street’s full-year forecasts respectively.
  • A final DPS of RM0.10 (+18% y-o-y) was declared, lifting total payout in FY18 to RM0.17 (+17% y-o-y).

Good increase in sales.

  • The company registered a good quarterly revenue growth of 11% q-o-q in 4QFY18. This was lifted by better volumes (+6% q-o-q on encouraging demand from emerging countries), positive ASP revision (+1% q-o-q due to cost pass-through to customers) and forex tailwinds (+3% q-o-q as the US dollar strengthened against the ringgit).

Dragged by higher raw material, interest and tax costs.

  • Despite the positive top-line growth, 4QFY18 core earnings (ex net forex losses) fell 9% q-o-q. This was due to:
    1. higher raw material prices (inched up at a quicker 3% q-o-q vs the 1% q-o-q rise in ASP);
    2. 45% q-o-q jump in interest expense; and
    3. elevated effective tax rate of 28% vs 11% in 3QFY18.
  • That said, robust capacity utilisation (~90%) and tight cost control helped prevent bottom line from declining at a faster clip.

Stock Impact

Unveiling new expansion plans.

  • With the acquisition of Aspion completed in early-April along with the completion of Factory 31 in July, Top Glove is now capable of producing up to 60.5b gloves per year.
  • Also, management unveiled its new expansion plans (Factory 33, 5A and 8A) on top of the outstanding expansion timeline for Factory 32 (by end-19). When all are fully operational by 2020, Top Glove’s manufacturing capacity will balloon to 70.3b gloves annually (+16%). The new lines are for nitrile gloves, which should raise capacity mix in this space to about 40% from 35% currently.
  • Management intends to achieve a 50:50 nitrile-to-latex glove production split over the longer term.

Rising threat of demand tapering?

  • Management shared it is still seeing only 40-45 days of forward orders, shorter than Dec 17's level of 50-60 days. Generally, we remain concerned about:
    1. rising competition where more nitrile glove supply capacity will be coming on- stream in the medium term; and
    2. the vinyl glove undersupply in China is easing with capacities restarting after 2017's environmental clampdown, prompting price-sensitive F&B customers to switch back to more economical glove offerings.

Earnings Revision / Risk

We introduce FY21 earnings estimates but make no changes to our FY19-20 forecasts.

Key upside risks include:

  1. recovering the RM640m from Adventa Capital,
  2. market share gains,
  3. more bona fide sizeable value-accretive M&As, and
  4. US dollar appreciating markedly vs the ringgit.

Valuation / Recommendation

Maintain SELL and target price of RM8.20, based on 18x 2019F PE, or +0.5SD above its 5-year forward mean PE of 16x but below the sector's 27x. The premium is fair as:

  1. Top Glove has been making steady headway into the generally faster-growing nitrile glove space; and
  2. despite the negative development at Aspion, the group is still touted as the no.1 surgical glove player globally.

That said, the discount to the glove sector is warranted, considering its relatively stretched balance sheet (net gearing of 0.9x vs peers' average of 0.1x).

Post-bonus issue, our target price is RM4.10, excluding the potential dilution from full guaranteed exchangeable bonds conversion into new Top Glove shares pending more details of the exercise.

Share Price Catalyst

  • Supply-demand imbalance structurally driving up ASP.
  • More meaningful bona fide M&As contributing to higher inorganic growth.
  • Innovative product offerings to disrupt the marketplace.

Source: UOB Kay Hian Research - 12 Oct 2018

Labels: TOPGLOV

Top Glove - Still Costs An Arm & A Leg

Author: UOBKayHian   |  Publish date: Thu, 4 Oct 2018, 9:08 AM


  • Despite some mixed signals and save for the potential one-off impairment relating to the overvaluation of Aspion, we expect a better overall core showing in 4QFY18. This takes into consideration:
    1. lower raw material prices,
    2. strong US dollar, and
    3. commissioning of 30 new lines at Factory 31.
  • All in all, we raise our FY19-20 earnings projections by 4-6% but keep that for FY18 unchanged. However, valuations remain rich and this is our key reason for a tactical bearish call. Maintain SELL but lift our target price to RM8.20.

What’s New

Drop in latex prices a boon.

Between June to August, average latex prices were soft, declining 19% y-o-y and 5% q-o-q to RM4.38/kg. This in turn should benefit Top Glove as 50% of its production revolves around natural rubber gloves; we estimate that every 1% drop in raw material cost could increase its earnings by 3%. That said, we foresee latex prices creeping up to the RM4.50-5.00/kg range in 4Q18.

We noticed the natural rubber inventory in Qingdao (main source of raw materials for China’s tire output) has fallen 8% ytd and could prompt some replenishment activities.

Booster from forex tailwinds.

  • The ringgit has been on a weakening trend against the US dollar in recent months but it is still nowhere near the RM4.50/US$ level back in early- 17 (currently: RM4.14/US$, +3% q-o-q/-6% y-o-y). The forex assumption we are using to project our financial estimates is based on an average of RM4.18/US$ over the next 1-2 years (raised from RM4.08/US$). We believe this would have already captured the potential upside risk from forex tailwinds.
  • Our calculations show that every 1% depreciation of the ringgit vs the US dollar could beef up Top Glove’s earnings by 7% (this analysis excludes the shared cost savings mechanism with customers which will consequently moderate any significant gain in profit margins).

Rising threat of demand tapering?

Management shared it is still seeing only 40-45 days of forward orders, shorter than Dec 17's level of 50-60 days. Generally, we remain concerned about:

  1. rising competition where more nitrile glove supply capacity will be coming on-stream in the medium term, and
  2. the vinyl glove undersupply situation in China is easing with capacities restarting after 2017's environmental clampdown, prompting price-sensitive F&B customers to switch back to more economical glove offerings.

Update on lawsuit.

We think the legal dispute with Adventa Capital is going to be a long drawn-out fight.

More recently, Top Glove obtained a new interim Mareva injunction (premised on fresh message evidence) to freeze and prevent dissipation of assets worldwide against the vendors of Aspion. The next court hearing takes place on 29 October. Besides, there could be a material one-off impairment in the upcoming 4QFY18 results pertaining to the overvaluation for the purchase of Aspion.

Recall that Top Glove is seeking an amount of RM640m.

Stock Impact

4QFY18 results preview.

Top Glove is slated to release its 4QFY18 results sometime in mid-October.

Despite some mixed signals and save for the potential one-off impairment, we expect a better overall performance with quarterly revenue coming in at ~RM1.2b and core profit of between RM130m-140m (+2-10% q-o-q/+61-74% y-o-y). This is premised on the back of:

  1. lower raw material prices,
  2. strong US dollar, and
  3. commissioning of 30 new lines at Factory 31.

Recall that Top Glove registered top- and bottom-lines of RM1.1b and RM127m in 3QFY18 respectively with lesser impact from the above-mentioned developments.

Earnings Revision / Risk

No changes to our FY18 earnings forecast, but we have revised up our FY19-20 estimates by 4-6% on higher US dollar forex assumption (+3% to RM4.18/US$ from RM4.08/US$).

Key upside risks include:

  1. recovering the RM640m from Adventa Capital,
  2. market share gains,
  3. more bona fide sizeable value-accretive M&As, and
  4. US dollar appreciating markedly vs the ringgit.

Valuation / Recommendation

Maintain SELL but with a higher target price of RM8.20 (from RM7.80) as we have raised our earnings forecasts.

For the valuation methodology, we are still employing the same price multiple, pegging Top Glove to an unchanged 18x 2019F PE. This is +0.5SD above its 5-year forward mean PE of 16x but below the sector’s 29x. The premium is fair as:

  1. Top Glove has been making steady headway into the generally faster-growing nitrile glove space, and
  2. despite the negative development at Aspion, the group is still touted as the no.1 surgical glove player globally.

That said, the discount to the glove sector is warranted, considering its relatively stretched balance sheet (net gearing of 0.8x vs peers' average of 0.1x).

Post-bonus issue, our target price would be RM4.10, excluding the potential dilution from full guaranteed exchangeable bonds conversion into new Top Glove shares pending more details of the exercise.

Share Price Catalyst

  • Supply-demand imbalance structurally driving up ASP.
  • More meaningful bona fide M&As contributing to higher inorganic growth.
  • Innovative product offerings to disrupt the marketplace.

Source: UOB Kay Hian Research - 3 Oct 2018

Labels: TOPGLOV

Traders' Corner - Pestech International (PEST MK)

Author: UOBKayHian   |  Publish date: Fri, 3 Aug 2018, 7:24 PM


  • Technical BUY with +17.6% potential return
  • Last price: RM1.59
  • Target price: RM1.78, RM1.87
  • Support: RM1.50
  • Stop-loss: RM1.49

BUY with a target price of RM1.87 and stoploss at RM1.49. Currently, share price is consolidating within the immediate support of RM1.50 before yesterday’s positive closing above the BBI sets a new tone for the short-term outlook. We expect PEST to continue to make higher highs and higher lows towards our target. A bullish bias has been established following an uptick in the DMI and MACD.

Expected Timeframe: 2 weeks to 2 months.

Source: UOB Kay Hian Research - 3 Aug 2018

Labels: PESTECH

Cahya Mata Sarawak - Outlook Remains Promising

Author: UOBKayHian   |  Publish date: Fri, 3 Aug 2018, 7:23 PM


CMS’ associate has been seeing strong interest from investors and the outlook for its subsidiary OMS remains bright with global demand-supply dynamics remaining favourable. We expect OMS to turn around significantly in 2018 (from loss-making in 2017) and become one of the biggest contributors to CMS’ earnings. Maintain BUY and target price of RM4.00 which implies 13.6x PE based on 2019F EPS.

WHAT’S NEW

  • A closer look at OMH. Investors are keen on the significant turnaround story expected for OM Holdings (OMH) which has a 75% stake in OM Materials Sarawak (OMS). The turnaround at OMH is expected to have a positive impact on Cahya Mata Sarawak (CMS) which has a 25% stake in OMS.

ESSENTIALS

  • OMS the world’s third-largest producer of ferrosilicon alloy. OMH was founded in 1994 and subsequently listed on the Australian Stock Exchange in 1998. It started up the Bootu Creek mine and Qinzhou smelter in 2005-06 and initiated the Sarawak smelter project in 2011. Its 75%-owned OMS operates a plant in Sarawak which is located at the Samalaju Industrial Park where it has 10 furnaces to produce ferrosilicon alloy and 6 furnaces to produce manganese; both are essential raw materials for steel production. The plant has a design capacity to produce 200,000-210,000 tonnes of ferrosilicon and 250,000-300,000 tonnes of manganese alloy p.a.. OMH’s key customers are leading steel players such as China Steel Corporation, Hyundai Steel, Nippon Steel & Sumitomo Metal and Thyssenkrupp. Today, OMS is the world’s third-largest producer of ferrosilicon alloy, after China and Russia.
  • Encouraging production data. As at 1H18, OMS produced 104,602 and 124,979 tonnes of ferrosilicon and manganese respectively, representing an increase of 30% yoy and >100% yoy from 1H17. To note, OMS fired its last furnace at the Samalaju plant on 1 Jun 18. Hence, we think production in 2H18 could be much stronger hoh. On a qoq comparison, production of ferrosilicon was stable in 2Q18. However, manganese production declined 4% qoq in 2Q18 due to a shift to higher grade manganese production to cater to market demand. Separately, OMS also shared that sales of ferrosilicon and manganese in 2Q18 dropped by 25% qoq and 18% qoq due to the festive season (which hampered port activities) but are expected to rebound in 3Q18.
  • Favourable global demand-supply dynamics. We think OMS’ success largely depends on China’s tight control on environmental protection. We understand that since China’s steel industry reform, the country’s ferrosilicon production has dropped considerably from 6m tonnes at its peak to only 3.2m tonnes. This led to a surge in ASP from US$900/tonne at the point when OMS started production compared to US$1,450/tonne now. Apart from that, OMS is also enjoying cheap power supply thanks to a 20-year contract for a fixed power price is approximately 50% cheaper compared to that recorded by other smelters. We believe that this is another key contributor to OMS’ success as power makes up about half of its total cost of production.
  • Future expansion depends on availability of power sources. As all of OMS’ 16 furnaces are up and running, future growth will be driven by Phase 2 operations at the Samalaju Industrial Park. Although it is still in the preliminary stage, Phase 2 will likely house another four furnaces and the timeline for construction is heavily dependent on the availability of power supply sources. The next source of power supply for Phase 2 in Sarawak will come from the Baleh Dam which is slated for full completion by 2025. However, management does not rule out the possibility of sourcing power from other sources (apart from the Baleh Dam). Management also remains confident that OMS will at least receive a partial allocation of the additional power supply that they have requested.
  • Ancillary income to support earnings. Organically, OMH shared that they intend to embark on an ore concentrate project as well as sinter plant project as part of its initiatives to re-use waste products and turn them into income generating products. OMH expects the projects to be commissioned by 1H19 and contribute 10-20% to revenue.

EARNINGS REVISION/RISK

  • None.

VALUATION/RECOMMENDATION

  • Maintain BUY and target price of RM4.00 based on a 25% holding company discount to our SOTP valuation, which implies 13.6x PE based on 2019F EPS. We also imputed a 23 sen “option value” for Malaysian Phosphate Additives (Sarawak) (MPAS) (assumption: 50% success rate, RM1.4b investment cost) from a NPV of RM490.1m based on CMS’ 40% stake in MPAS. CMS currently trades at a forward PE of 10x. Share price has fallen 13% from its recent high and with the strong fundamentals, we expect the PE to trend closer to pre-general election levels.

CATALYSTS

  • Significant earnings recovery at OMS which will be driven by higher ASPs as well as higher utilisation of furnaces.
  • Gradual improvement at other business segments which will be fuelled by the construction of Pan Borneo Highway and Baleh Dam.

Source: UOB Kay Hian Research - 3 Aug 2018

Labels: CMSB

Traders' Corner - TMC Life Sciences (TMCL MK)

Author: UOBKayHian   |  Publish date: Fri, 3 Aug 2018, 7:21 PM


  • Technical BUY with +17.0% potential return
  • Last price: RM0.765
  • Target price: RM0.865, RM0.895
  • Support: RM0.70
  • Stop-loss: RM0.695

BUY with a target price of RM0.895 and stop-loss at RM0.695. Based on the chart, TMCL formed a bullish candle and closed above the BBI line after the recent pullback movement. An uptick in the RSI and DMI suggests a rising momentum, which in our view, could push the share price towards our targets of RM0.865 and RM0.895 in the near term. Currently MACD is on the verge of making a golden cross to the positive signal.

Expected Timeframe: 2 weeks to 2 months.

Source: UOB Kay Hian Research - 3 Aug 2018

Labels: TMCLIFE

 

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