Top Glove - Positive Catalysts in Sight

Date: 15/10/2018

Source  :  MAYBANK
Stock  :  TOPGLOV       Price Target  :  12.00      |      Price Call  :  BUY
        Last Price  :  4.47      |      Upside/Downside  :  +7.53 (168.46%)

No Impairment a Positive Surprise; Upgrade to BUY

  • Top Glove’s 4QFY18 results were weaker q-o-q but still came in within expectations.
  • We raise our FY19-20E EPS by 4% p.a. and introduce FY21E.
  • With the impairment concern eliminated and its robust earnings outlook, we raise our 2019 PER target to 30x (from 26x; 10% discount to our PER target for Hartalega) to derive our new Target Price of MYR12.00 (+21%). Upgrade the stock to BUY (from HOLD).
  • Key catalysts:
    1. 1-for-1 bonus issue to go-ex on 24 Oct;
    2. potential inclusion into FBMKLCI in the upcoming review in Dec.

Results in Line

Top Glove’s 4QFY8/18 net profit of MYR102m (-14% q-o-q, +3% y-o-y) brought FY18 net profit to MYR434m (+30% y-o-y), making up 98% and 96% of our and street’s full-year forecasts.

Additionally, a final DPS of 10sen was declared, bringing full-year DPS to 17sen (FY17: 15sen), in line with its net profit payout policy of 50%.

Dragged by Higher Tax Rate, No Impairment Needed

Key takeaways from Top Glove’s 4QFY18 results:

  1. Sequentially stronger revenue growth (+11% q-o-q) was underpinned by higher sales volume (+6% q-o-q, +27% y-o-y) and higher USD/MYR (+3% q-o-q);
  2. EBITDA margin was flattish q-o-q as the higher USD/MYR and lower latex cost offset the higher NBR cost;
  3. however, bottomline was weaker q-o-q on a higher tax rate of 28% (+17.1-ppt q-o-q) given the deferred tax;
  4. No impairment (for its overvaluation claim for Aspion) was provided/needed following its impairment test;
  5. Aspion recorded full-quarter net profit of MYR4m, lower than what it recorded in 3QFY18 (MYR7m for 2 months), potentially due to fair value loss on its USD loan.

Project FY19 EPS Growth of 14%

We raise our FY19-20E EPS by 4% p.a. as we raise our USD/MYR assumption to 4.05 (from 3.95) and update for NBR and latex cost assumptions. We now project FY19E EPS growth of 14%, underpinned by the full-year consolidation of Aspion’s earnings and organic sales volume growth of 8%.

We also project Top Glove’s FY19E EBITDA margin to improve 0.9-ppt given Aspion’s premium margin.

No Impairment Required

In regards to Top Glove’s overvaluation claim (MYR641m) for the acquisition of Aspion, no impairment was provided/needed in 4QFY18 following its internal impairment test results.

For the purpose of the impairment test, Top Glove has assessed the recoverable amount of Aspion based on its value-in-use, which in turn is determined based on its DCF projection of Aspion.

Potential Inclusion Into FBMKLCI

Next review for the FBMKLCI constituents will be based on the closing price on 26th Nov with the constituent changes to take effect on 24 Dec, we estimate. As per the closing price yesterday, we think Telekom Malaysia (TM MK, HOLD) could be dropped out of the FBMKLCI while the potential replacements could be Top Glove (market cap: MYR13.7b) and F&N Holdings (FNH MK, Not rated; market cap: MYR13.07b).

Source: Maybank Research - 12 Oct 2018

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