Highlights

Top Glove Corporation - Looking Forward to a Stronger 4QFY19

Date: 19/06/2019

Source  :  DBS VICKERS
Stock  :  TOPGLOV       Price Target  :  4.80      |      Price Call  :  HOLD
        Last Price  :  4.45      |      Upside/Downside  :  +0.35 (7.87%)
 


  • Top Glove's 3QFY19 results within expectations.
  • Expect stronger 4QFY19 on the back of higher ASP.
  • Capacity expansion of +38% by end CY20.
  • Maintain HOLD with Target Price of RM4.80.

What’s New

Within expectations.

  • TOP GLOVE CORPORATION BHD registered a net profit of RM74.7m in 3QFY19 (-29.4% y-o-y; -36.5% q-o-q), bringing 9MFY19 net profit to RM290.5m, accounting for 64%/62% of our/consensus full-year forecasts. We deem it within expectations as we expect a stronger 4QFY19.
  • The lower profit for the quarter was mainly due to the time lag between raw material price and selling price hikes.
  • Top Glove’s raw material price was higher in the early part 3QFY19, but its selling price hike only came towards the tail end of 3QFY19. Nonetheless, revenue met expectations.

Maintain FY19 earnings.

  • Despite the weak 3QFY19 numbers, we keep our FY19 earnings forecast as we anticipate a stronger 4QFY19.
  • We expect 4QFY19 to be boosted by higher selling prices in Jun and Jul 2019, and a marginal decline in raw material price in Jun 2019.

Interim dividend.

  • Top Glove declared an interim first single-tier interim DPS of 3.5 sen in 3QFY19 (vs 3.5 sen in 3QFY18 adjusted for the bonus issue), translating into a yield of 0.7%.
  • We are expecting a final dividend of 5.4 sen, with a total payout ratio of 50% (same as FY18’s). See Top Glove's dividend history.

Result Review

Stronger revenue.

  • Top Glove's 3QFY19 revenue came in at RM1,190m (+2.6% y-o-y, +8.1% q-o-q), supported by higher sales volume (+9.0% y-o-y, +2.0% q-o-q). The quantum of y-o-y revenue improvement was weaker than that of sales volume growth, mainly due to weaker ASP.

Weaker ASP y-o-y.

  • ASP in USD terms was weaker y-o-y but flattish q-o-q. Nitrile raw material prices were weaker y-o-y at RM4.37/kg (-3.1% y-o-y, -1.3% q-o-q), while natural rubber latex prices were flattish y-o-y at RM4.42/kg (+22.1% q-o-q).

Weaker EBIT/k gloves.

  • EBIT/k gloves came in at RM7.36 (- 34.7% y-o-y, -29.9% q-o-q). The significant drop was mainly due to the time lag in passing down the raw material cost increase. It may take 1-2 months to adjust selling prices. Thus, we are expecting a better 4QFY19.

Outlook

Steady in expanding.

  • Top Glove currently operates 32 glove factories with the capacity to produce 60.5bn gloves p.a. It is currently working on expanding multiple factories in Malaysia, Thailand and Vietnam. In the near term, its expansion plan includes Factory F32, F33 New Block and F2B Refurbishment. This new capacity will be operational from 2QCY19 onwards progressively, with an additional capacity of 5.4bn gloves p.a.
  • For CY20, expansion plans include Factory F5A, Factory F40, Factory F42 (Phase1), Factory F41 (Vietnam), and Factory F8A (Thailand).
  • All in all, these expansion plans will add 224 lines and a capacity of 22.8bn gloves p.a. at the end of CY20. This will raise the group’s annual capacity to 83.3bn gloves (+38%).

Biodegradable nitrile glove received a good response from market.

  • Top Glove just launched a new product – a biodegradable nitrile glove that has been proven to degrade 10 times faster than conventional nitrile gloves. The product has received good response from the market, especially developed countries as they are now placing emphasis on environmentally friendly products.

Focus on digitalisation and automation to save costs.

  • In the middle to longer framework involving the application of Internet of Things (IoT), robotics and automated real-time manufacturing systems. This is to reduce the efficiency of the manufacturing process.

Valuation

Positives priced in.

  • We maintain our HOLD call with a higher target price of RM4.80 as we roll forward our valuation to CY20. Using the latest SGD-MYD exchange rate of 1 vs 0.3275, we derive target price of 1.572 in SGD term.
  • Our Target Price is based on 23x CY20 EPS, which is equivalent to +1SD of its 5-year mean PE.
  • We believe the positives have already been faster-than-expected recovery of Aspion’s performance.

Source: DBS Research - 19 Jun 2019

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