Investment Highlights

• We maintain our BUY call on Top Glove with a slightly lower FV of RM6.35/share, based on DCF (at a discount rate equivalent to its WACC of 6.4% and a terminal growth rate of 2.5%). This is after we have revised down our FY19F and FY20F earnings forecast by 7.8% and 2.3% respectively to reflect slightly higher interest and tax cost. At our FV, the implied CY19F P/E is 16.3x.

• 1QFY19 net profit missed our expectations, accounting for only 21.5% and 21.3% of our and street’s full-year forecast respectively. The variance against our forecast came largely from a higher-than-expected interest expenses of RM18.7mil (vs. RM1.6mil in 1QFY18) as well as higher effective tax rate.

• We continue to like Top Glove for: (1) its expansionary plans; (2) focus and continual efforts in improving quality and operational efficiency; and (3) its position as the world’s largest rubber glove manufacturer.

• Key highlights of Top Glove’s 1QFY19 results include:
  1. ASP rose by 14%, leading to 1QFY19 topline growing 34.5% YoY (3.7% QoQ) on the back of strong demand growth from both developed and emerging markets. Coupled with increased capacity and higher utilization, sales volume climbed 19% YoY.
  2. Top Glove maintained its EBITDA margin of 16.4% resulting in EBITDA of RM207.5mil (+34.6% YoY) in tandem with its topline growth. Compared with 1QFY18, the average natural rubber (NR) latex and nitrile latex prices movement were mixed where NR latex dropped 24% from to RM3.78/kg from RM5.00/kg while nitrile latex price increased 25% to US$1.26/kg from US$1.01/kg.
  3. On the other hand, PBT margin dropped 1.8ppt to 11.2% due to higher interest cost from the funding for M&As and its organic expansions. The bottom line was further dragged by a higher effective tax rate of 21.3% (vs. 13.2% in 1QFY18) due to a deferred tax liabilities provision of RM5.7mil. Ultimately, net profit only grew by 4.4% YoY (8.3% QoQ) to RM124.3mil (vs. RM103.2mil in 1QFY18).

• Moving forward, we believe there could be some pressure on margins in CY19F stemming from the influx of glove supply of the “Big 3” producers (Top Glove, Kossan, Hartalega). CY19F will see an enlarged supply of gloves by 14%, although the expansion will come at a gradual pace. As this exceeds the organic demand growth expectation of 8-10%, we believe ASP will be weighed down slightly initially. It will take 6-12 months for demand-supply to reach equilibrium.

• Top Glove’s earnings are expected to be anchored by capacity-led expansions. The company’s FY19F earnings will be supported by Factory F32 which is slated to commence production by 1QCY19 and 3QCY19, with 2.2bil pieces and 1.2bil pieces of capacity respectively. We opine that Top Glove is well positioned to benefit from the expected 8-10% growth in demand for rubber gloves for CY19 as it is currently the largest rubber glove manufacture with circa 25% of market share.

Source: AmInvest Research - 18 Dec 2018