Top Glove - Ending With a Dip

Date: 27/09/2019

Source  :  HLG
Stock  :  TOPGLOV       Price Target  :  5.31      |      Price Call  :  BUY
        Last Price  :  4.59      |      Upside/Downside  :  +0.72 (15.69%)

Top Glove’s 4QFY19 core PATAMI of RM81.4m (+0.6% QoQ, -2.1% YoY) brought full year FY19 core PATAMI to RM382.4m (-14.6% YoY). The result was within our expectations but slightly below consensus. Declared final dividend of 4 sen per share (FY19 : 7.5 sen per share vs. FY18 : 8.5 sen per share). FY19 revenue grew to RM4.8bn (+13.9%) YoY due to higher sales volumes (+10%; mainly +46% surgical glove, +30% nitrile glove); however core PATAMI fell (-14.5%) due to time lag of cost-pass through mechanism and increased cost of depreciation (+34%) and higher interest expense (+125%). We keep our forecasts; maintain our BUY call with unchanged TP of RM5.31.

Within expectations. 4QFY19 revenue of RM1,189.6m (-0.1% QoQ, -2.2% YoY) with core PATAMI of RM81.4m (+0.6% QoQ, -2.1% YoY) brought full year FY19 core PATAMI to RM382.4m (-14.6% YoY). The result came within our expectations but slightly below consensus, at 96% and 93% respectively.

Dividend. Declared a final interim dividend of 4 sen p/share going on ex on the 9th December 2019, Bringing FY19 Dividend to 7.5 Sen P/share (FY18: 8.5 Sen P/share).

QoQ. Revenue fell slightly (-0.1%) mainly due to a decline in overall sales volume (- 5%). Volume for natural rubber (-18%) and vinyl (-10%) segment fell, however this was partly mitigated by an increase contribution of nitrile glove segment (+12%). Core PATAMI improved by 0.6% to RM81.4m due to lower net tax expense (-84%) on the back of recognition of deferred tax income from unutilised tax losses and allowances.

YoY. Revenue fell to RM1,189.6m (-2.2%) in tandem with volume decline (-2.0%). EBITDA margin declined by 3.6 ppts YoY to 11.8% due to losses in vinyl segment due to competition and higher interest cost (+13%) YoY. Subsequently, PBT declined (- 42.8%) to RM81.2m. However, core PATAMI grew 7.2%, due to lower tax expense of RM1.1m in 4QFY19 vs RM40.0m in 4QFY18.

FY19. Revenue of RM4,801.8m showed improvement of 13.9% on the back of improved sales volume (+10%). The positive sales volume growth mainly resulted from surgical glove (+46%) and nitrile glove segment (+30%). However this was partially offset by decline in vinyl gloves segment (-29%). EBITDA margin declined by 1.8ppts due to increase in competition in natural rubber segment coupled with the spike in natural rubber latex prices (time lag of cost-pass through mechanism; start to kick in 4QFY19). Following that, depreciation increased (+34%) due to additional expansion, and higher interest expense (+125%) was mainly due to acquisition of Aspion back in FY18 (FY18: 5 months impact, FY19: 12 months). However this was partially cushioned by lower effective tax due to recognition of deferred tax income. Hence all in, core PATAMI fell to RM382.4m (-14.5%), with a marginally lower effective tax rate (FY19: 13% vs. FY18: 16%).

Outlook. Top Glove remains in expansion mode, albeit at a more moderate pace to mitigate impact on ASP. Efforts remain on widening of different segments of gloves (latex/nitrile/bio-degradable examination gloves). Top Glove is strengthening their focus on the nitrile glove segment; and has increased its nitrile capacity by 54% over the past 2 years, with plans to grow further.

Forecast. Unchanged pending analyst briefing next week as the results were in line.

Maintain BUY, TP: RM5.31. We maintain our BUY call and unchanged TP of RM5.31. Our TP is based on FY20 earnings pegged to a PE multiple to 26x. We like Top Glove for its diverse product mix and its prime position to chip away market share.


Source: Hong Leong Investment Bank Research - 27 Sept 2019

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