Highlights

Top Glove Corporation Bhd - Another Set of Weak Results

Date: 27/09/2019

Source  :  TA
Stock  :  TOPGLOV       Price Target  :  4.41      |      Price Call  :  SELL
        Last Price  :  4.45      |      Upside/Downside  :  -0.04 (0.90%)
 


Review

  • Top Glove reported FY19 net profit of RM370.6mn (-12.7% YoY). Excluding forex losses of RM11.8mn, FY19 core net profit of RM382.4mn (-13.7% YoY) came in within our but below consensus estimates at 97.5% and 93.7% of full-year estimates respectively.
  • YoY, FY19 adjusted PBT declined by 17.6% to RM442.5mn despite higher revenue growth of 13.8% to RM4.8bn on the back of higher sales volume growth of 10%. We attribute the poor performance to: i) competition in the natural rubber glove segment, which caused margin compression, ii) time-lag in passing on the increase of natural rubber raw material cost and iii) higher finance cost. Coupled with the losses from the vinyl glove segment, FY19 adjusted PBT margin declined by 3.5p.p to 9.2%.
  • Besides, Aspion continued to underperform, recording profit of circa-RM19mn in FY19, which was way below the profit of RM108.3mn for 2019 guaranteed by the vendor previously.
  • QoQ, 4QFY19 adjusted PBT declined by 13.6% to RM83.8mn underpinned by lower sales volume, which dropped by circa-4.5% and losses from the vinyl glove segment. However, net profit increased by 7.2% to RM80.1mn mostly due to the lower tax rate of 1.3% (versus 8.6% in 3QFY19) following the recognition of deferred tax assets from unutilised tax losses and allowances.
  • Separately, the group announced a final dividend of 4.0sen/share. This will bring FY19’s total dividend to 7.5sen/share (FY18: 8.5sen/share), representing a payout ratio of 52%.

Impact

  • We adjust our FY20/FY21 earnings estimates lower by 5.3%/5.7% after lowering our ASP assumptions by 0.7% and imputing FY19 figures into our model.

Outlook

  • We expect sales volumes to pick up by circa-8% in 1QFY20 results as demand has normalised. Management alluded that gross margin will recover by 5-10% in FY20 as natural rubber price is on a downward trend (currently at RM4.38/kg versus RM5.11/kg in April-19).
  • In terms of capacity expansion, Top Glove’s total capacity is expected to increase by 31.6% to 84.1bn gloves/annum (63.9bn/gloves currently) by end-2020.

Valuation & Recommendation

  • Following the earnings cut, our target price for Top Glove is revised lower to RM4.41/share (previously RM4.67/share) based on an unchanged PE of 26.0x against CY20 EPS. Maintain Sell.

Source: TA Research - 27 Sept 2019

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