Highlights

Top Glove: Aspion Likely to Achieve RM80m Profit in Coming Years

Date: 18/10/2018

Source  :  MACQUARIE GROUP
Stock  :  TOPGLOV       Price Target  :  10.86      |      Price Call  :  HOLD
        Last Price  :  4.27      |      Upside/Downside  :  +6.59 (154.33%)
 


Glove manufacturer Top Glove held a briefing on its results for the financial year 2018 (FY18), stating that Aspion’s net profit for the financial year ended 31 August 2018 amounted to an estimated RM20m to RM30m. Management is optimistic on Aspion’s long-term target to take 6 years to achieve the previous profit guarantee of RM80m. Macquarie Equities Research (MQ Research) wrote a report yesterday summarizing the update on Aspion and others.

Conclusion

  • Top Glove held an analyst briefing on its 4QFY18 results. The key takeaway from the briefing is that the nitrile glove segment is becoming more competitive as MQ Research expected and management remains optimistic on Aspion’s long-term target to take six years to achieve the previous profit guarantee of RM80m. In light of increased pricing pressure into 2019, MQ Research maintains their Neutral recommendation on Top Glove.

Impact

  • Update on Aspion. It only contributed RM4m (4% of Group’s profit after tax (PAT)) in 4QFY18, mainly due to higher interest cost from its USD-denominated loans. Going forward, management targets Aspion to contribute 10% to the group’s PAT, translating to RM40-45m/pa. This would be achieved through i) restructuring USD-denominated loans; ii) cost synergies from raw material procurement of RM15m; iii) improved plant efficiency, which is currently running at a 60-65% utilisation rate.
  • Goodwill impairment test was based on the net projected profit range of RM40m-65m for FY19-23E and weighted average cost of capital (WACC) of 7.4%, which is the median WACC of the glove industry. This impairment test will be done annually. Aspion’s PAT contribution accounts for 8-12% of MQ FY19-20E.
  • Higher sales volume (+6% q-q) in 4QFY18 was led by latex powder free (+10% q-q), nitrile (+17%) and surgical gloves (+26%). It was mostly driven by developing markets, especially China, India and Vietnam which experienced >100% y-y growth rate in FY18.
  • Price of nitrile latex, the key raw material has dropped 4-5% month-on-month (MoM) in October on the resumption of butadiene supply. Hence, Top Glove is likely to reduce its average selling price of nitrile gloves in November to pass on the savings.
  • Management indicates the nitrile glove segment is increasingly more competitive now and will be a more challenging space early next year. This is in-line with MQ Research’s expectation of an oversupply in 1H19.
  • Top Glove has received approval to launch its five-year convertible bond to raise up to US$300m. The proceeds are likely to be used to repay its borrowings for the Aspion acquisition (RM1.2bn). This should lead to interest savings of about RM20m/year (3% of FY18 earnings before interest, tax, depreciation and amortization (EBITDA)).
  • Impact of US-China trade war is insignificant to Top Glove as United States only imposed a 10% tariff on China’s non-medical vinyl gloves which are selling at US$14-15/thousand pcs. MQ Research thinks the price gap between vinyl and nitrile gloves (USD24-25/thousand pcs) is too wide, even if it imposed a 10% import tariff. This is unlikely to create a demand shift from vinyl to rubber gloves like the industry experienced at the end of 2017.

Action and Recommendation

  • MQ Research maintains their Neutral recommendation with a target price of RM10.86 based on 27x CY19E EPS.

Source: Macquarie Research - 18 Oct 2018

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