Top Glove - Better Earnings Ahead

Date: 18/12/2018

Source  :  MAYBANK
Stock  :  TOPGLOV       Price Target  :  6.43      |      Price Call  :  BUY
        Last Price  :  5.10      |      Upside/Downside  :  +1.33 (26.08%)

To Remain Shariah-compliant; Maintain BUY

  • Stronger 1QFY8/19 earnings was within our expectation and street’s.
  • We expect sequential earnings to be better on lower input costs, capacity addition and better earnings from Aspion. 
  • Maintain our earnings forecasts, BUY call and Target Price of MYR6.43 (based on 30x 2020 PER; 10% discount to our target PER for Hartalega).
  • Top Glove should remain in Securities Commission’s Shariah list in the next review in May 2019.

Results Within Expectations

  • Top Glove's 1QFY19 core net profit of MYR110m (+8% q-o-q, +9% y-o-y) made up 22% of our and street’s full-year forecasts.
  • Net gearing remained elevated at 75% (end-4QFY18: 77%) due to the acquisition of Aspion. However, conventional debt/total asset stood at approximately 30% as at end- 1QFY19 (similar to its FY18 annual report), below the Securities Commission’s Shariah threshold of 33%.

1QFY19: Stable Sales Volume, ASP and Margin

  • Key takeaways from 1QFY19 results:
    1. Revenue grew slightly q-o-q (+4% q-o-q, +35% y-o-y) due to higher USD/MYR (+3% q-o-q -1% y-o-y) and marginally higher sales volume (+1% q-o-q, +19% y-o-y). Meanwhile, ASP was flattish q-o-q (+14% y-o-y);
    2. EBITDA margin dipped slightly to 16% (-0.3-ppt q-o-q, +0.7-ppt y-o-y) owing to the weaker vinyl earnings. The EBIT of its vinyl division weakened substantially to MYR2m (-70% q-o-q, -77% y-o-y) following the full resumption of supply in China;
    3. Aspion registered a net loss of MYR3-4m (4QFY18: MYR4m net profit) given the ongoing upgrading works at its plants;
    4. Group’s effective tax rate was lower q-o-q at 21% (-6.9- ppt q-o-q, +8.1% y-o-y) as there was additional provision for taxes in 4QFY18.

Expect Better Quarters Ahead

  • Earnings could be better ahead as we think its margins could improve on lower input costs. Additionally, new capacity from F32 (phase1) and F33 would commercialise in 2Q-3QFY19 (+6% to 63.9b pcs p.a.), hence, lifting its sales volume in the near-term.
  • Moreover, Aspion could turn profitable in 2HFY19 upon the resumption of some of its production lines (the entire upgrading works is expected to complete in FY20).

Source: Maybank Research - 18 Dec 2018

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TOPGLOV 5.10 -0.07 (1.35%) 10,684,700 

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