• Top Glove (TG) 3QFY19 PATAMI fell 29.4% qoq and 36.5% yoy to RM74.7m due to surge in natural rubber latex prices, time lag in selling prices revision, competition and negative contribution from vinyl glove.

• An interim DPS of 3.5sen was declared (vs 3QFY18: 3.5sen) which within our expectation, implying a 21% payout.

• We revised down earnings for FY19/20/21 by 6.5%/5%/5% respectively to account for higher operating cost than expected and time lag of cost pass through. Despite this, 4QFY19 results expected to improve and long term prospect remains promising.

• Maintain HOLD with new TP of RM4.92 based on 27x PER and roll forward to FY20 EPS.

Below expectation

TG’s 9MFY19 PATAMI of RM290.5m (-12.5%) was below our and consensus forecast at 65% and 63% respectively. Overall, results were impacted by higher natural rubber latex prices, time lag in selling prices revision and stiffer competition.

3QFY19 earnings mostly impacted by surge in latex prices

TG’s 3QFY19 revenue increased to RM1.2bn (+2.6% qoq, +8.1% yoy). This is due to overall higher sales volume (+2% qoq, +9% yoy) coming from North America, Eastern Europe and Asia mitigating the drop in ASPs especially in nitrile glove due to higher competition. However, PATAMI slipped to RM74.7m (-29.4% qoq, -36.5% yoy) due to i) sharp upward movement in the natural rubber latex prices (c.-22%), ii) time lag in selling price as well as iii) partly impacted by vinyl glove sales in China due to competition and oversupply. Hence, PATAMI margin eroded to 6.3% (- 2.8ppt qoq, -4.4ppt yoy).

Earnings revised downward

We reduce our earnings for FY19/20/21 by 6.5%/5%/5% respectively to account for higher raw material prices and time lag of cost pass through.

Long term outlook remains promising

We expect TG’s 4QFY19 results to improve on better margins due to NR glove ASPs upward revision from May 2019 onwards. Long term prospect remains promising due to i) growing global demand supported by TG’s planned capacity expansion to 83.3bn p.a (c.+37%) by end 2020 (refer table 2), ii) improved product quality as well as innovation, and iii) continued cost efficiency effort. On overcapacity concern, we expect it to be temporary with oversupply cycle lasting about 6-9 months. Furthermore, TG will closely monitor the developments to ensure its expansion plans are aligned with the demand and supply situation.

Maintain HOLD with new TP RM4.92

Following our earnings revision and rolling forward valuation to FY20 EPS, we have derived new TP of RM4.92 (from RM4.20). Our implied target PE is 27x (1SD of its 5-yrs historical forward mean). This is fair given its position as the world’s largest glove maker as well as potential growth from expansion in organic and inorganic.

Source: BIMB Securities Research - 19 Jun 2019

• Foreign holdings of MYR debts securities decreased to RM175.9bn

• Foreigners sold RM3.8bn of MGS and RM0.5bn of GII

• Total portfolio outflow of RM6.24bn for equities and debt securities combined

• MYR bonds remain supported although global sentiment remains soft

Foreign funds remained net seller of domestic debts with a net loss of RM4.2bn in May. This brought the total stock of foreign holdings lower to RM175.9bn in May, equivalent to 11.9%. This was the lowest since February 2010 (11.2%). However, total outstanding and foreign holdings in 2010 was much lesser when compared to 2019 figures.

Foreign investors sold Malaysia’s debt securities in May as total foreign holdings decreased by RM4.2bn to RM175.9bn. Foreign holdings of MGS declined by RM3.8bn to RM143.3bn (Apr: RM147.1bn; Mar: 150.7bn; Feb: RM149.3bn; Jan: RM144.4bn). Foreign investors also reduced their holdings of GII by RM0.5bn to RM14.7bn (Apr: RM15.2bn; Mar: RM18.7; Feb: RM17.4bn; Jan: RM16.6bn). Given the net outflow of RM4.3bn to RM158.0bn in foreign ownership of government debt (MGS + GII), total foreign holding in government debt edged lower to 21.7% from 22.7% in Apr.

Foreign holdings of discount instruments remained stable at RM5.9bn. Foreign holdings of PDS increased slightly by RM0.1bn to RM12.0bn. As a result, in combined amounts (inclusive of short-term bills/notes and corporate bonds/sukuk), foreign holding levels in May 2019 were lower by RM4.2bn, bringing total foreign ownership of MYR bonds to RM175.9bn or 11.9% (Apr: 12.5%).

As at end-May, international investors sold RM4.2bn of Malaysian bonds (Apr: - RM9.9bn; Mar: +RM3.0) whilst the Malaysian equity market recorded total foreign outflow of RM2.04bn (Apr: -RM1.4bn; Mar: -RM1.6bn). This means a total portfolio outflow of RM6.24bn for equities and debt securities combined. Meanwhile, in the corresponding period, Malaysia’s foreign international reserves decreased by USD1.1bn to USD102.3bn (Apr: USD103.4bn; Mar: USD103.0bn).

Source: BIMB Securities Research - 12 Jun 2019

• Distributive trade weakened to 5.3% yoy but decreased 4.0% mom in April

• Sales value remained above RM100.0bn in April

• Weaker monthly growth was underpinned by sales value for all sub-sectors recorded negative growth

• Global retail sales remained weak

• 2019 retail sales growth revised upwards to 4.9%

Growth in distributive trade eased slightly to 5.3% in April, lower than 5.5% registered in the preceding month. The monthly sales value amounted to RM105.1bn. Retail sales, which contributed 40.3% to total distributive trade, increased by 6.3% yoy in April to RM41.6bn, slowing from 6.9% rise in the prior month. The expansion was driven by retail sale of food, beverages & tobacco in specialised stores (Apr: 8.8%; Mar: 9.4%), retail sale via stalls & markets (Apr: 8.2%; Mar: 9.8%) and retail sale of cultural & recreation goods in specialised stores (Apr: 7.2%; Mar: 8.1%). Likewise, sales of motor vehicles also increased at a slower pace of 2.2% yoy. On the other hand, wholesale trade increased at a slightly faster pace of 5.3% yoy to reach RM51.2bn from 5.0% in the previous month.

On monthly basis, the distributive trade decreased 4.0% after registering an increase of 5.8% in March as sales value for all sub-sectors recorded negative growth. Sales of wholesale trade declined 3.8% mom (Mar: +6.1%; Feb: -5.1%; Jan: +0.2%). Monthly sales of retail trade contracted 4.7% (Mar: +2.6%; Feb: -3.0%; Jan: -1.8%) while sales value of motor vehicles declined 2.0% (Mar: +16.8%; Feb: -11.6%; Jan: +2.6%).

Source: BIMB Securities Research - 11 Jun 2019

• Malaysian market closed off their highs in relatively quiet holiday-shortened week – the KLCI ending the week at 1,649.33, almost unchanged from previously.

• A net foreign inflow of RM350.0m continued to support the KLCI’s performance. Meanwhile, local institutional and retail were net sellers at -RM323.3m and -RM26.7m respectively.

• Cumulative net foreign outflow stood at RM4.4bn at end of week 23 versus -RM2.9bn during the same period in 2018.

• A US rate cut is seeing supporting global stocks – and ringgit – as trade war risk to the economy rises.

Foreign funds continue to be net buyers

Malaysia’s KLCI remained at its 3-month high level after another week of inflow. Net foreign inflow was seen during the last 5 trading days – a trend last seen in early February – totaling a substantial RM785m. The inflow has helped the KLCI recovered swiftly from a near-4 year low of 1,572 (recorded on 14 May).

There is optimism creeping in on stocks domestically as large cap stocks continue to rebound. A weak US jobs report of only 75K payrolls expansion in May could see the US cutting interest rates as early as July. Recall that BNM has reduced its OPR to 3% in May. A similar cut in US rates is seen as supporting the ringgit which has been under pressure over the last 2 months. In recent days the ringgit has gained slightly, recovering to RM4.16 against the USD versus RM4.20 a week ago. Economic news were mixed for Malaysia as the latest figures showed Malaysia’s export expanding by 1.1% yoy in April, after falling for 2 consecutive months. Meanwhile, Malaysia’s Nikkei PMI was registered at 48.8 in May down slightly from April’s 49.4.

Expectation for interest rate cuts

The market is now expecting the KLCI to finish 2019 lower than what was expected at the beginning of the year. Following the recent 1Q19 earnings release, the KLCI’s aggregate earnings for FY2019 is now expected at approx 2% versus 5% estimated during Januari 2019. The weaker earnings notwithstanding, there is slight optimism on Malaysia’s equities following a run of outflow since February. The ringgit could receive a slight boost from the US jobs data which provided further evidence of a slowdown in the US economy. The yield on the 10-year Treasury has declined to a 20-month low on Friday and there is a likelihood that we could see a US interest rates cut sooner rather than later.

Source: BIMB Securities Research - 10 Jun 2019

• US adds 75,000 jobs in May

• Unemployment rate down remained near 50-year low of 3.6%

• Labor force participation rate remained at 62.8%

• Wage growth up 0.2% mom; 3.1% yoy

• US jobs and wage growth slows in warning sign for economy

Job growth in the US showed a substantial slowdown in the month of May. The nonfarm payroll (NFP) employment rose by 75,000 jobs in May after soaring by a downwardly revised 224,000 jobs in April, a worrisome turn that points to a slowing economy and is likely to put more pressure on the Federal Reserve to cut interest rates. Consensus had expected employment to increase by about 185,000 jobs compared to the jump of 263,000 jobs originally reported for the previous month.

Hiring slackened off in almost every key segment of the economy and employment fell in retail and government. Professional-oriented companies added 33,000 jobs, hotels and restaurants boosted payrolls by 26,000 and health-care providers hired 16,000 workers. These have been the three fastest-growing areas of the economy since an expansion began 10 years ago. Construction companies hired just 4,000 new workers while retailers shed jobs for the fourth straight month. Government also cut 15,000 jobs, failing to get a boost from temporary census hiring.

On the plus side, the unemployment rate remained near a 50-year low of 3.6% as a 113,000-person increase in the household survey measure of employment was offset by a 176,000-person jump in the size of the labor force. The labor force participation rate remained steady at 62.8%, and other measures of labor market slack improved. The U6 unemployment rate, which includes people working part-time for economic reasons fell to 7.1%, from 7.3% in April. That is the lowest rate seen since 2000.

Despite the historically low unemployment rate, the report also showed average hourly employees earnings edged up just 0.2% mom while the increase over the past 12 months slowed to 3.1% from 3.2%.

Source: BIMB Securities Research - 10 Jun 2019

• Malaysia’s manufacturing PMI contracts further in May

• Global manufacturing PMI posts lowest reading since October 2012

• US manufacturing activities dips lower

• Eurozone manufacturing activities continues to contract

• UK manufacturing activities moved into contraction in May

• China’s manufacturing PMI edges down

• Japan manufacturing PMI slips into contraction

• ASEAN manufacturing PMI improves marginally

Malaysia’s manufacturing PMI contracts further in May

The manufacturing sector in Malaysia continued to contract in May, and at a faster rate. Malaysia’s Nikkei manufacturing PMI recorded 48.8 in May, down slightly from April’s seven-month high of 49.4 but below the long-run average. Latest survey data revealed further challenges for Malaysian manufacturers during May, with firms continuing to report a weakening demand environment, particularly in international markets. Manufacturing output remained under pressure during May, reflecting challenging demand conditions facing the sector. New export orders subsequently returned to contraction in May. However, despite continuing to signal a headwind from weak demand, the survey gauge of total new orders is running at its secondhighest since 3Q18 so far in 2Q19. Manufacturing employment was broadly stable. Purchasing activity also declined in May, partly due to an increased focus on cost control amid slower production growth. Meanwhile, prices indicated a pickup of inflationary pressures in May. Anecdotal evidence indicated that unfavourable exchange rate variations had exacerbated raw material price increases, leading overall operating costs to rise at the fastest pace since last November. Output prices increased at the quickest rate in six months as firms sought to protect margins. On a positive note, Malaysian manufacturers were the most upbeat towards future output volumes since October 2013.

Source: BIMB Securities Research - 4 Jun 2019