Top Glove Corporation Berhad - A Decent Year

Date: 18/10/2018

Source  :  PUBLIC BANK
Stock  :  TOPGLOV       Price Target  :  10.00      |      Price Call  :  HOLD
        Last Price  :  4.73      |      Upside/Downside  :  +5.27 (111.42%)

Top Glove held their 4QFY18 results briefing yesterday, hosted by its Chairman, Tan Sri Lim Wee Chai. The Group’s revenue and net profit grew 23.6% and 32.0% YoY in FY18 respectively. The robust performance was mainly driven by sales volume growth with high utilisation rate and improvement in operational efficiency which led to lower cost level. As a result, EBITDA margin has improved by 2.2 ppts to 16.4%. FY18 sales growth was mainly driven by stronger demand for latex gloves from developing regions. Underpinned by the sustained growth in demand for rubber gloves, we project a 3-year earnings CAGR of 9%. We maintain our earnings estimates and Neutral call with an unchanged-TP of RM10.00 (post-bonus issue: RM5.00).

  • FY18. To recap, Top Glove’s FY18 revenue and net profit grew 23.6% and 32.0% YoY respectively. The robust performance was mainly driven by i) sales volume growth (+26% YoY) with high utilisation rate (90%), ii) improvement in operational efficiency and hence, lower cost, iii) higher sales of latex glove with lower natural rubber latex price, and iv) higher ASP which offset the external factors impact.
  • Improvement in operational efficiency. The Group’s EBITDA margin has improved by 2.2 ppts to 16.4% mainly attributable to the improvement in operational efficiency through digitalization and automation via the application of Internet of Things (IoT), robotics and automated real time manufacturing system. As a result, the Group managed to derive 20% of gas energy savings in FY18, which minimised the 24% natural gas tariff hike impact. In addition, it is also reducing its reliance on workers with 14% reduction in workers over the past 12 months, which resulted in the number of workers per million pcs of gloves falling from 2.9 workers to 2.5 workers (only include direct workers). In the long term, the Group has reduced 4,000 workers over the past 4 years. Besides, the Group has also improved its line speed by 10%.
  • Product mix. In term of product mix, latex gloves continued to account for the bulk at 51% (latex powdered: 31%, latex powder-free: 20%), followed by nitrile glove at 36%, vinyl / TPE / CPE glove at 11% and surgical glove at 2%. We understand that the Group prefers to have a balanced and diversified product mix in order to capture the demand growth from emerging markets which are more price sensitive.
  • Demand mainly driven by developing regions. By geography, the bulk of the group’s sales growth in FY18 was mainly driven by developing regions (72%). This was led by Asia ex-Japan (+58.0%), Eastern Europe (+39.6%), Middle East (+38.7%) as well as Africa (+35.3%). For Asia ex-Japan especially, demand growth from China, India and Vietnam surpassed 100% in FY18, though coming from small base. China accounts for 4% of the Group’s total sales in FY18 (from 2% in FY17) while India made up 2% of the Group’s total sales in FY18 (from 1% in FY17).
    We believe the growth was contributed by the rising healthcare awareness and hygiene standards in developing regions, the switching trends towards disposable glove and the vinyl glove supply disruption in China. In line with the demand growth from developing regions, we note that Top Glove’s latex powdered glove sales volume grew by 24% YoY in FY18 after three years of consecutive decline in sales volume. In addition, we understand that the sales growth in FY18 was mainly from its existing customer (90%).
  • No impairment required, based on 5-year DCF projection. Sensitivity analysis based on different levels of WACC (i.e. 6.4%, 7.4% and 8.5%) and terminal growth rate (i.e. with 1.375% of terminal growth rate and without terminal growth) were carried out for Aspion’s goodwill impairment test, and all the tests came out with same results showing that no impairment provision is required. The net projected profit for the impairment test range from RM40m (FY19F) to RM65m (FY23F). Note that impairment provision is required to be conducted every financial year end. With the help of technology and Group’s track record and experience in turning around loss-making glove factories, Top Glove is confident in its ability to enhance Aspion’s contribution going forward via the allocation of additional resources from Top Glove team, further improvement of glove production process, synergies and cost savings.

Source: PublicInvest Research - 18 Oct 2018

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