Top Glove - Results Disappointed

Date: 27/09/2019

Source  :  MAYBANK
Stock  :  KOSSAN       Price Target  :  5.10      |      Price Call  :  BUY
        Last Price  :  4.19      |      Upside/Downside  :  +0.91 (21.72%)
Source  :  MAYBANK
Stock  :  TOPGLOV       Price Target  :  4.30      |      Price Call  :  HOLD
        Last Price  :  4.60      |      Upside/Downside  :  -0.30 (6.52%)

But We Expect Improvement Ahead; Maintain HOLD

  • TOP GLOVE CORPORATION BHD's 4QFY19 net profit was below our/consensus expectations on weak sales from stiff competition in the latex segment. However, competition has subsided and we expect Top Glove to benefit temporarily from the trade war.
  • We reduced our FY20-21F EPS by 11-13% and introduce FY22F. Our Target Price is also reduced to MYR4.30 (-11%), pegging to an unchanged CY20F P/E of 26x (10% discount to our target P/E for Hartalega).
  • Our preferred pick is Kossan (BUY, Target Price MYR5.10) for its exposure in the non-medical segment and undemanding CY20F P/E of 22x.

Results Below Our/consensus Expectations

  • Top Glove's 4QFY8/19 net profit of MYR80m (+7% q-o-q, -21% y-o-y), brought FY19 net profit to MYR371m (-15% y-o-y) and made up 93%/90% of our/street’s full-year estimates.
  • The company also declared a final DPS of 4sen, bringing full-year DPS to 7.5sen (-12% y-o-y), representing 51% of FY19 net profit. See Top Glove's dividend history.

Affected by Stiff Competition in Latex Segment

  • Despite a higher overall ASP (+5% q-o-q), revenue was flattish q-o-q on weaker sales volume (-5% q-o-q). There was volume weakness in the latex segment (-12 to 23% q-o-q), potentially due to competition from Sri Trang (SGX:NC2).
  • Nitrile volume was stronger (+12% q-o-q), potentially due to a faster demand for its nitrile non-medical gloves, a result of the structural demand shift from plastic vinyl. Its plastic glove recorded weaker revenue (-17% q-o-q, -54% y-o-y) and wider EBIT loss of MYR4m (3QFY19: MYR2m);
  • Aspion sank into a pretax loss of MYR4m (3QFY19: MYR4m PBT) as the operation of the sterile vendor was affected.

Temporary Boost From US-China Trade War

  • Earnings may improve in 1QFY20 on strong demand for its nitrile glove following US 15% tariff on China’s rubber examination gloves. Also, we understand that the latex gloves sales have also improved slightly, potentially due to better global demand.
  • Nevertheless, we reduce our FY20-21F EPS by 11%/13% as we trim our ASP assumption for latex glove by 3% p.a. as we think stiff competition may recur given Sri Trang’s ambition of becoming world’s top 3 glove producer (5th largest now).

Source: Maybank Research - 27 Sep 2019

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Chart Stock Name Last Change Volume 
TOPGLOV 4.60 0.00 (0.00%) 1,685,300 
KOSSAN 4.19 -0.01 (0.24%) 946,000 

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