Highlights

MQ Research Maintains OP on Top Glove Despite Lower Profits

Date: 27/09/2019

Source  :  MACQUARIE GROUP
Stock  :  TOPGLOV       Price Target  :  5.02      |      Price Call  :  BUY
        Last Price  :  4.50      |      Upside/Downside  :  +0.52 (11.56%)
 


Glove-maker Top Glove Corporation (Top Glove) released its financial results for the fourth quarter ended 31 August 2019 (4QFY19), reflecting a 13% decline in net profit to RM80m. The company declared a final dividend of 4 sen per share, payable 23 December 2019. Despite the decline in profits, MQ Research maintains Outperform (OP) on Top Glove.

Event

  • Top Glove reported a poor set of 4QFY19 results with profit after tax (PAT) of RM80m (-13% y-y; +7% q-q), taking full-year FY19 net profit to RM371m (+12% q-q), 6% below MQ Research’s estimate. Following our checks with management, the miss was due to lower sales volume of latex gloves, wider losses for its vinyl plant in China (-RM3.7mn) and higher finance costs.
  • It declared a final dividend of 4sen, amounting to a total dividend of 7.5sen for FY19E (52% payout ratio). It will hold an analyst briefing on 4 Oct (Friday).

Impact

  • Operationally, 4QFY19 sales volume reported a mixed picture with nitrile glove increasing 10% q-q, while latex glove dropped 18% q-q. The reduction in latex glove volume was due to price competition from Sri Trang, the Thailand glove manufacturer and slower demand growth from emerging markets. Per MQ Research’s ASEAN conference note, management indicates Sri Trang gained market share from Top Glove in certain price sensitive markets.
  • Gross profit (GP) margin of latex glove recovered 2ppts to 16% in 4QFY19, driven by the average selling price (ASP) increase during March to May. GP margin of nitrile glove also increased 1-2ppts to 19% in this quarter. However, this is offset by the wider losses in the vinyl glove segment in its China factory. As such, Group earnings before interest, tax, depreciation and amortization (EBITDA) margins dropped 0.3ppts to 12.5%.
  • In terms of demand, nitrile glove segment continues seeing stronger demand with order lead time of 45-50 days, while latex glove remains sluggish with a lead time of 30 days. In light of losing market share to Sri Trang, Top Glove appears to be more aggressive going forward in the latex glove segment. MQ Research estimates every US$1 drop in latex glove ASP would lower MQ Research’s PAT forecast by 18-20%. Nonetheless, MQ Research thinks the margin impact can be mitigated by production cost savings – i) the latex raw material price continues its downtrend; ii) its ongoing cost initiatives to reduce labour cost.

Action and Recommendation

  • MQ Research maintains Outperform with a target price of RM5.02 based on 25x price to earnings ratio (PER).

12-month Target Price Methodology

  • TOPG MK: RM5.02 based on a PER methodology

Source: Macquarie Research - 27 Sept 2019

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