Highlights

Top Glove - Cautious on Impairment

Date: 13/09/2018

Source  :  MAYBANK
Stock  :  TOPGLOV       Price Target  :  9.90      |      Price Call  :  HOLD
        Last Price  :  5.17      |      Upside/Downside  :  +4.73 (91.49%)
 


Maintain HOLD

  • Top Glove’s share price bottomed in Jul 2018 and has risen 20% since. However, share price may have a knee jerk reaction upon the release of its 4QFY18 results in Oct 2018 as we expect its earnings to be hit by a sizable impairment.

  • Elsewhere, positive external factors bode well for its near- term earnings and its 1-for-1 bonus issuance is targeted to complete by Oct 2018.

  • Maintain earnings forecasts, HOLD call and target price of MYR9.90 (26x 2019 PER; 20% discount to our target for Hartalega).

4QFY18E: Better Core Earnings, But Weak Headline

  • Top Glove’s 4QFY8/18 results will be released on 19 Oct and we expect a better q-o-q core earnings (3QFY18: MYR118m), underpinned by stronger sales volume, stable margins (USD/MYR: +3% q-o-q, latex: -10%, NBR: +10%) and full quarter earnings contribution from Aspion (only recognised 1.5 months earnings in 3QFY18). However, headline profit could be hit be by a sizable impairment, in relation to Top Glove’s overvaluation claim for the purchase of Aspion (total overvaluation claim amounts to MYR640m).

Positive External Factors

We think near-term earnings growth will continue to be supported by the stronger USD/MYR of 4.15 presently (4QFY18: average 4.05), benign latex prices of MYR4.05/kg presently (4QFY18: average MYR4.20/kg) and stable NBR price of USD1.34/kg presently (4QFY18: average USD1.33/kg).

Additionally, demand for Malaysia’s rubber gloves remains robust (1Q18: +9% y-o-y) and the potential US import tariff of 10-25% on China’s gloves may lead to slightly better demand for Malaysia’s gloves. In 1Q18, Malaysia and China supplied 68% and 10% of US’s rubber glove demand.

Maintain Earnings Forecasts

Our earnings forecasts have assumed for USD/MYR rate of 3.95 for FY18- 20E. Based on our sensitivity analysis, every 1% change in USD/MYR could change our EPS estimates by 4%.

Meanwhile, Top Glove is working on initiating the arbitration process but a conclusion could be long drawn.

We have assumed that Top Glove will be recognising the actual earnings from Aspion, rather than the profit guarantee in our FY18-20E EPS.

Swing Factors

Upside

  • Changes in lenient regulatory requirements in developing markets which could accelerate global glove-demand growth.
  • Sharp fall in rubber prices.
  • Substantial rise in USD/MYR.

Downside

  • Sharp fall in USD/MYR.
  • Substantial rise in rubber prices.
  • Undisciplined capacity expansion by industry players may lead to intense competition.

Source: Maybank Kim Eng Research - 07 Sep 2018

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Labels: TOPGLOV

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