Investment Highlights

• We maintain our BUY call on Top Glove Corporation (Top Glove) with a lower FV of RM5.47/share based on a P/E of 27.7x FY20F EPS. We cut our earnings forecast for FY20F and FY21F by 14.5% and 8.7% respectively as we reduce our margins expectations due to 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 FY19 net profit of RM370.6mil (-12.7% YoY) was below both our and street’s estimates. The deviation was largely due to lower-than-expected margins as the group faced tough competition.

• Key highlights of Top Glove’s FY19 results include:

• Top Glove’s FY19 revenue grew 13.8% YoY to RM4,801.8mil on the back of a 10% increase in sales volume and a 1% rise in ASP.

• The group’s capacity has expanded by 5.6% to circa 63.9bil pieces in FY19 and capacity utilization remained close to 90%. This was driven by strong demand from the developed markets.

• We believe that Top Glove’s business in the USA will benefit from the US-China trade war (the USA made up circa 27% of sales volume). However, this would be slightly offset by increased competition in other markets.

• The group’s EBITDA grew by 1.0% to RM706.8mil in FY19. However, EBITDA margin dropped 1.9ppt to 14.7%. This was attributed to the sharp rise in the natural rubber latex price of more than 30% between February and April 2019. This resulted in a pricing mismatch between the cost of raw materials and selling price. The group also faced tough operating conditions due to the hike in labour cost and natural gas tariff.

• We believe the group’s ability to pass on the cost increase was also impeded by increased competition. However, the group’s nitrile glove sales mix which increased to 42% (36% in FY18) slightly mitigated the drop in margin as Top Glove’s nitrile gloves command a slightly higher margin compared with latex gloves.

• The group attributed the softer performance in FY19 to increased competition in the natural rubber glove segment, spike in natural rubber latex prices, slower growth in demand in emerging markets and losses from the vinyl glove segment. Top Glove’s China unit recorded an operating loss of RM4.1mil in FY19 (EBIT of RM27.9mil in FY18) due to increased competition.
• Moving forward, Top Glove will continue to face pressure on margins due to the influx of nitrile and latex glove supply in CY19 and CY20 of 15.0% and 22.3% respectively by the top rubber producers (Top Glove, Kossan, Hartalega) as well as from Thailand-based Sri Trang with plans to increase latex glove supply to 30bil pieces (from 21bil currently) by 2020. As this exceeds the organic demand growth expectation of 8–10%, we believe ASP will come under pressure. We have reduced our EBITDA margin estimates for FY20F and FY21F to 14.9% and 15.1% respectively.

Source: AmInvest Research - 27 Sept 2019