Investment Highlights

• We maintain our BUY call on Top Glove Corporation. We have changed our valuation method from DCF to P/E valuation based on an FY20F P/E of 27.7x (+0.5SD) with a lower FV of RM5.56/share (previously RM5.66/share). Our PE multiple is based on the 1-year industry average forward PE.

• We have revised our earnings forecast downwards by 3.6%/1.6%/1.9% for FY19F/FY20F/FY21F as we lower our margin assumptions slightly on the back of higher raw material prices and stiff competition.

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

• Top Glove’s 9MFY19 net profit of RM290.5mil (-12.5% YoY) was below both our and street’s estimates, accounting for 64.0%–63.2% of full-year forecasts respectively. The bottom line took a hit due to lower-than-expected margins as natural rubber input price spiked 22.1% QoQ within a short span while the price revision will only take effect in June 2019 due to time lag.

• Key highlights of Top Glove’s 3QFY19 results include:

• Top Glove’s 3QFY19 sales grew to RM1,190.2mil (+8.1% YoY, +2.6% QoQ) following a 9% YoY (2% QoQ) increase in sales volume. However, EBITDA margin dropped 3.6ppts QoQ to 13.0% (16.6% in 2QFY19) resulting in a 19.7% QoQ drop in EBITDA to RM154.8mil (RM192.7mil in 2QFY19). This was mainly attributed to stiff competition as well as a steep climb in natural rubber latex which rose 22.1% QoQ in 3QFY19 (leading to a mismatch between raw material cost and selling price). This was slightly mitigated by the easing of nitrile rubber price to US$1.05/kg (-2.8% QoQ, - 8.7% YoY).

• Subsequently, 9MFY19 topline rose 20.5% YoY where sales volume expanded 15% YoY (latex powder free +13%, nitrile +35%, surgical +75%, vinyl -25%). The demand growth came from most regions due to an increase in healthcare and hygiene awareness.

• Its 9MFY19 EBITDA improved 11.4% YoY to RM555.0mil (RM498.3mil in 9MFY18) albeit experiencing a slight drop in its EBITDA margin by 1.3ppt to 15.4% (16.6% in 9MFY18). This is on the back of the sharp rise in natural rubber latex price in the latest quarter which impeded margins due to the lag in price hike.

Source: AmInvest Research - 19 Jun 2019