Investment Highlights

• We maintain our BUY call on Top Glove with an unchanged fair value of RM11.85/share. Our fair value for Top Glove is based on DCF, which has a discount rate of 6.4% and a terminal growth rate of 2.5%. At our fair value of RM11.85/share, the implied CY19F P/E is 26.4x.

• The group reported 4QFY18 revenue of RM1,216.9mil (QoQ: 10.6%, YoY: 34.8%). Eliminating forex and FV gain on hedging contracts, core net profit amounted to RM115.9mil (QoQ: -9.0%, YoY: 20.2%) bringing FY18 core earnings to RM452.4mil (YoY: 38.2%). This came in within both our and consensus’ expectations.

• The group has proposed a final dividend of 10 sen/share, bringing total dividend payout in FY18 to 17 sen/share (14.5 sen/share in FY17). This translates to a payout ratio of 50%.

• Its topline grew by 23.6% YoY buoyed by: (1) a 26% growth in sales volume, (2) 6% increase in ASP; (3) the strengthening USD vs. the MYR; and (4) improved utilization rate (FY18: 90% vs. FY17: 80%).

• Core net profit surged 38.2% YoY as EBITDA margin improved 1.9ppts YoY to 16.7% from 14.7%. This was attributed to: (1) improved internal efficiencies which contributed to the reduction of manpower requirement; and (2) hefty decreases in raw material costs. Compared with FY17, the average natural rubber latex and nitrile latex prices in FY18 decreased by 20.6% and 3.3% respectively.

• Going forward, Top Glove’s earnings is expected to be anchored by capacity-led expansions. We estimate revenue to grow by 20% in FY19F, underpinned by 11% increase in production volume.

• Factory 32 and Factory 33 are slated to commence operations in FY19F. This would raise annual production capacity from 60.5bil in FY18 to 67.1bil pieces of gloves in FY19F. Its newest factory, Factory 8A in Thailand is expected to commence operations in early 2020, adding in circa 9.8bil of capacity in FY20F.

• Top Glove remains on the lookout for synergistic M&As to further strengthen its positioning as the world’s biggest rubber glove supplier. Management is confident that it will be able to expand its global market share from 25% to 30% by 2020. The global demand for rubber gloves is expected to remain healthy with an annual growth rate of circa 10%.

Source: AmInvest Research - 12 Oct 2018