KL Trader Investment Research Articles

Author: kltrader   |   Latest post: Tue, 17 Sep 2019, 10:10 AM


Top Glove - A Disciplined Player

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Lowering PER Target; Downgrade to HOLD

  • Top Glove's share price fell 15% YTD on industry over-expansion risk and waning USD/MYR.
  • We maintain our earnings forecasts which have imputed for ASP pressure. However, our target price is reduced to MYR5.10 (from MYR6.43) as we lower our CY20 PER target to 24x from 30x (10% discount to our target PER for Hartalega; mean: 17x) to account for the industry oversupply risk.
  • Downgrade the stock to HOLD.

Capacity Growth of Only 6% in 2019

  • TOP GLOVE CORPORATION’s expansion plan is the most aggressive in the industry with an absolute 8.8b pcs of annual capacity planned for 2019. However, the new capacity is back-loaded to 4Q19 and will likely gradually commence from 1Q20. Adjusting for the likely timing, Top Glove’s capacity growth is only 6% for 2019 and potentially higher at 10-15% for 2020.
  • That said, management has also stated that it would scale back on its expansion if demand is slower than expected. Its overall plant utilization is full at 90% now and its sales order lead time is normal at 30-45 days.

Aspion to Lift Overall Margins

  • Top Glove’s 1QFY8/19 earnings had been dragged by Aspion (1QFY19: MYR3-4m net loss) due to the plant upgrading work it is undertaking, which led to lower output. However, we expect Aspion to turn profitable again in 2HFY19 upon the resumption of some of its production lines (the entire upgrading works is expected to complete in FY20).
  • Our EBITDA margin estimate for Top Glove is higher at 17-18% for FY19-21F (FY18: 16%) as we expect the premium margin of surgical gloves at Aspion to lift Top Glove’s overall margins.

Expect Better Earnings Ahead

  • We think earnings should be better ahead as we think Top Glove’s margins could improve on lower input costs and higher USD/MYR. Additionally, new capacity from F32 (phase1) would commercialise in 2Q-3QFY19 (+4% to 62.7b pcs p.a.), hence potentially lifting its sales volume in the near-term.

Source: Maybank Research - 16 Jan 2019

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