Top Glove - Diversified Portfolio

Date: 24/09/2019

Source  :  MAYBANK
Stock  :  TOPGLOV       Price Target  :  4.85      |      Price Call  :  HOLD
        Last Price  :  4.52      |      Upside/Downside  :  +0.33 (7.30%)
Source  :  MAYBANK
Stock  :  KOSSAN       Price Target  :  5.10      |      Price Call  :  BUY
        Last Price  :  4.23      |      Upside/Downside  :  +0.87 (20.57%)

But Earnings Recovery Priced In; Maintain HOLD

  • Despite its more diversified glove portfolio, TOP GLOVE CORPORATION BHD was similarly affected by stiff competition in 1HCY19. Although we expect earnings to improve with a pick-up in demand for its nitrile medical gloves, our earnings forecasts already impute a strong earnings recovery.
  • Maintain HOLD and Target Price of MYR4.85, at 26x CY20E P/E or a 10% discount to our target for Hartalega in view of its lower margins/ROEs.
  • Prefer Kossan in the sector (BUY, Target Price MYR5.10) for its exposure in the non-medical segment and undemanding valuation.

Affected by Competition in 1HCY19

  • We estimate that rubber medical gloves account for 85% of its sales volume. They are followed by plastic gloves, at 9%. Plastic gloves are facing a structural decline while rubber non-medical-glove sales, at 6% of its sales volume, are rising.
  • Though non-medical gloves cushioned its earnings from weakness in other segments in 1HCY19, we believe a spike in latex costs affected its earnings.

Strong Demand for Its Nitrile Medical Gloves

  • Reflecting a pick-up in global glove purchases, the sales lead time for its nitrile medical gloves has risen to 50-60 days from 30-45. We believe global demand has picked up after purchasers’ minimal purchases in 1HCY19 amid trade-war uncertainties. Now that the US has implemented import tariffs on all of China’s gloves (except surgical gloves), we think importers are more certain of their total purchase costs.

Better Q-o-q But Weaker Y-o-y 4Q

  • 4QFY8/19 results are scheduled for release on 26 Sep. We expect net profit to be better q-o-q but weaker y-o-y (3QFY19: MYR75m, 4QFY18: MYR102m). We think there could be volume growth, driven by new capacity from F32 (Phase1) and F33, which will raise its total capacity by 6% upon full commencement.
  • Margins may also improve q-o-q from higher latex glove ASPs and lower latex costs.

Source: Maybank Research - 24 Sep 2019

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Related Stocks

Chart Stock Name Last Change Volume 
TOPGLOV 4.52 +0.02 (0.44%) 402,900 
KOSSAN 4.23 +0.01 (0.24%) 75,900 

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