Highlights

Top Glove - Spot On

Date: 27/09/2019

Source  :  DBS VICKERS
Stock  :  TOPGLOV       Price Target  :  4.50      |      Price Call  :  HOLD
        Last Price  :  6.99      |      Upside/Downside  :  -2.49 (35.62%)
 


  • Top Glove's 4QFY19 results within expectations.
  • Better q-o-q on higher contribution from the nitrile glove segment.
  • Declared final DPS of 4.0 sen; total yield of 1.6%.
  • Maintain HOLD and Target Price of RM4.50.

What’s New

Within expectations.

  • TOP GLOVE CORPORATION BHD registered a net profit of RM80.1m in 4QFY19 (-21.2% y-o-y; +7.2% q-o-q), bringing FY19 net profit to RM370.5m, which is within expectations.

Final dividend.

  • Top Glove declared a final single-tier DPS of 4 sen in 4QFY19 (vs. 5.0 sen in 4QFY18 adjusted for the bonus issue). Total dividend was 7.5 sen in FY19 (vs. 8.5 sen in FY18), translating into a yield of 1.6%. This is higher than our expectations of DPS of 5.4 sen. See Top Glove's dividend history.

Result Review

Better earnings q-o-q.

  • Top Glove's 4QFY19 net profit came in at RM80.1m, increasing 7.2% q-o-q. The improvement was mainly driven by higher contribution from the nitrile glove segment. Net margin improved to 7% in 4QFY19 compared to 6% in 3QFY19, thanks to upward revision in selling price for natural rubber gloves.

Weaker ASP y-o-y.

  • The average selling price (ASP) in USD terms is weaker y-o-y but increased q-o-q for 4QFY19. Nitrile raw material prices were weaker y-o-y at RM4.41/kg (- 14.2% y-o-y, +0.9% q-o-q), while natural rubber latex prices were higher y-o-y at RM4.65/kg (+5.2% q-o-q).

Weaker EBIT/k gloves.

  • EBIT/k gloves came in at RM7.58 (- 35.7% y-o-y, +3.0% q-o-q). The better EBIT/k q-o-q was mainly due to the upward revision of selling price for natural rubber gloves, with the time lag for passing through raw material cost increases in 3QFY19 normalising.

Outlook

Capacity expansion.

  • From its latest update in Sep 2019, the Group’s total installed capacity is 63.9bn pieces of gloves. The capacity expansion plan remains intact where Factory F32 Phase 2 is expected to commence operations in 4QCY19, while F2B’s refurbishment has been scheduled to 1QCY20.
  • Expansion plans for CY20 include F2B refurbishment, Factory F5A, Factory F40, Factory F42 (Phase1), Factory F41 (Vietnam), and Factory F8A (Thailand). These expansions will add capacity of 18.2bn gloves p.a. in CY20, raising Top Glove’s annual capacity to 84.1bn pieces at the end of CY20 – representing a 32% increase from the current installed capacity of 63.9bn pieces. We have incorporated management’s capacity expansion guidance for into our earnings forecasts.

Focus on digitalisation and automation to save costs.

  • In the middle to longer term, management intends to embark on digitalisation and automation efforts via the Industry 4.0 framework involving the application of Internet of Things (IoT), robotics and automated real-time manufacturing systems. This is to reduce the foreign labour reliance and improve the efficiency of the manufacturing process.

Valuation

Valuations at higher end.

  • Our Target Price of RM4.50 is based on 23x CY20 EPS, which is equivalent to +1 SD of its 5-year mean PE. We maintain our HOLD call as Top Glove is trading at 32x FY19 PE, equivalent to +2.5 SD of its 5-year mean PE or +2.0 SD of its 10-year mean. (Using the latest FX rate of RM1 to 0.3296SGD, we derive target price of 1.483 in SGD term).
  • A key re-rating catalyst for Top Glove would be a faster-than-expected recovery of its subsidiary Aspion.

Source: DBS Research - 27 Sep 2019

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TOPGLOV 6.99 -0.06 (0.85%) 34,488,700 

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