Top Glove Corporation - FY18 Barely Made the Grades

Date: 12/10/2018

Source  :  KENANGA
Stock  :  TOPGLOV       Price Target  :  8.85      |      Price Call  :  SELL
        Last Price  :  4.75      |      Upside/Downside  :  +4.10 (86.32%)

FY18 results came in within expectations. FY18 PATAMI of RM433.6m (+31.9% YoY) came in within expectations at 96%/98% of our/consensus full-year forecasts. A final DPS of 10.0 sen was proposed, bringing full-year FY18 DPS to 17.0 sen (FY17: 14.5 sen) which is above our expectation. As such we raised both our FY19E and FY20E DPS from 14.5 sen to 17.0 sen each. The 1-for-1 bonus issue will go ex on 24 Oct 2018.

Key result highlights. QoQ, 4Q18 revenue rose 10.6% due to higher sales volume (+6%) and ASPs (+1%), underpinned by strong demand emanating particularly from Asia as well as Eastern Europe and Latin America. 4Q18 PBT rose 6% but PBT margin fell 0.5ppt to 11.7% from 12.2% in 3Q18 as improvement in production efficiency and new capacity coming on-stream was slightly offset by higher input nitrile latex prices (+13.9%) which caused some pricing pressure. This brings 4Q18 PATAMI to RM101.6m (-13.6%) due to a higher effective tax rate of 28.2% (due to provision for deferred tax) compared to 11.0% in 3Q18.

YoY, FY18 revenue rose 23.6% to a record high of RM4,214.0m due to higher sales volume (+26%) and ASPs (+6%). The improved results followed strong demand growth stemming from developed and emerging markets, particularly from Asia (including India, China and Vietnam), as well as Eastern Europe and Latin America. FY18 PBT margin expanded by 1.2ppt to 12.4% compared to 11.2% in FY17 due to better economies of scale, improved productivity and higher ASP although slightly chipped by a marked increase in natural gas price. As a result, FY18 PATAMI was higher by 31.9% to RM433.6m.

Shorter lead time indicating strong demand tapering off. We understand that the production of vinyl gloves in China has resumed and normalised in early 2018. Hence, over the past six months, delivery lead time (the time frame between order and delivery) has shortened from 60-70 days to 30-45 days, indicating that the strong demand is potentially tapering off.

Outlook. Looking ahead, Top Glove is in the process of constructing several manufacturing facilities namely, Factory 32 (Phases 1 & 2 to be completed early and end-2019 respectively; 4.4b pieces), Factory 33 (operational by March 2019; 1.2b pieces), Factory 5A (operational by Oct 2019; 2b pieces) and Factory 8A (operational by early 2020; 3.2b pieces) which will boost the Group’s total number of production capacity by 9.8b gloves per annum to 69.1b (+14%).

Maintain UNDERPERFORM. TP is RM8.85 based on 23x FY19E EPS (+1.0 SD above 5-year forward historical mean). We are feeling less optimistic about the short-to-medium prospects for Aspion as irregularities discovered could prove a setback, albeit temporary, and coupled with the impending legal case, the profit guarantees are at risk.

A key upside risk to our call is the higher-than-expected sales volume.

Source: Kenanga Research - 12 Oct 2018

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