Top Glove Corporation - Quarterly Earnings May Have Bottomed

Date: 18/06/2019

Source  :  CIMB
Stock  :  TOPGLOV       Price Target  :  5.20      |      Price Call  :  BUY
        Last Price  :  4.60      |      Upside/Downside  :  +0.60 (13.04%)

  • TOP GLOVE CORPORATION BHD's 9MFY8/19 net profit of RM290.5m was below expectations, at 65.4% of our and 63.2% of consensus full-year estimates.
  • The shortfall in 3QFY19 results was owing to:
    1. a sharp spike in latex prices,
    2. intensified pricing competition and
    3. higher depreciation charges.
  • Maintain ADD, with a higher Target Price of RM5.20 (26x CY20F P/E).

Weak Profit Margins in Latex Segment From Spike in Latex Prices

  • Top Glove's 3QFY8/19 revenue rose 2.6% q-o-q, mainly owing to higher sales volume (+2% q-o-q). However, 3QFY19 EBITDA margins dipped 3.6% pts q-o-q, which we attribute to a sharp spike in latex prices (+22% q-o-q) in the quarter as well as intensified pricing competition, particularly in the latex and vinyl segments.
  • Accordingly, 3QFY19 net profit came in 29.4% lower q-o-q at RM74.7m, despite a lower effective tax rate of 8.6% in 3QFY19.

9MFY19 Net Profit Came in Below Expectations

  • As a result of the weaker-than-expected 3QFY19 results, 9MFY19 net profit came in below expectations at 65.4% of our and 63.2% of Bloomberg consensus full-year results.
  • We attribute the 12.5% y-o-y decline in 9MFY19 net profit to:
    1. a sharp increase in finance cost ( > 100% y-o-y) and depreciation costs (+41.6% y-o-y), mainly due to the acquisition of Aspion,
    2. higher raw material prices and
    3. intensified pricing competition.
  • On a bright note, Aspion’s 9MFY19 PBT contribution to the group was positive at RM7.5m (from losses in 9MFY18), with Top Glove stating there is minimal impairment risk at this juncture.

Expecting Better Quarters Ahead

  • In our view, Top Glove’s earnings may have bottomed in 3QFY19 and should post stronger results ahead. Our optimism is premised on:
    1. commissioning of new glove production capacity,
    2. tailwinds from weaker ringgit vs. US$,
    3. improved supply-demand dynamics from better absorption of new glove supply and
    4. higher selling prices to reflect the recent increase in latex prices.
  • In addition, we expect Aspion to record sequentially stronger results, backed by higher production output and better economies of scale.

Lowering Our FY19-21F EPS by 2.0-15.6%

  • Given the poor 3QFY19 results, we lower our FY19-21F EPS estimates by 2.0-15.6%. This is mainly to account for
    1. higher latex prices,
    2. an increase in tax rates and
    3. lower average selling prices for gloves due to pricing competition.

Maintain ADD, With a Higher Target Price of RM5.20

  • Maintain ADD, with a higher Target Price of RM5.20, based on a higher P/E of 26x, in-line with +1 s.d. of its current 5-year mean, from 24x previously.
  • Despite the weak 3QFY19 results, we believe that any sell-down is a buying opportunity as the worst is over for Top Glove. We believe Top Glove remains attractive due to:
    1. defensive nature of its business,
    2. position as the world’s largest glove maker and
    3. it is a beneficiary of potential tailwinds from weak higher glove demand from spillover effects of US-China trade war.

Source: CIMB Research - 18 Jun 2019

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