Investment Highlights

• We maintain our earnings forecast, FV of RM6.22/share and HOLD call. Our valuation is based on an unchanged target PE of 20x on FY18F EPS.

• The group reported 4QFY17 revenue of RM902.4mil (QoQ: +3.8%, YoY: +25%). Eliminating forex and FV gain on hedging contracts, core net profit amounted to RM96.4mil (QoQ: +19.8%, YoY: +66.8%), bringing FY17 core earnings to RM327.3mil (YoY: - 6.7%). This came in within both our and consensus’ expectations.

• The group has proposed a final dividend of 8.5 sen/share, bringing total dividend payout in FY17 to 14.5 sen/share (same as FY16). This translates to a payout ratio of 54.6%.

• Its top line grew by 18% YoY and registered a historical high of RM3,409.2mil, buoyed by: (1) 7% growth in sales volume (especially in the nitrile glove sector which commands a higher ASP, in addition to the ramp-up production capacity); (2) increase in ASP following a surge in raw material costs; (3) strengthening of the USD vs. the MYR; and; (4) improved utilization rate (FY17: 80%-85% vs. FY16: 75%-80%).

• Despite the robust revenue growth and improved operating efficiency, net profit shrunk 6.7% YoY. EBITDA margin narrowed 3.7ppts YoY to 14.1% from 17.8%. This was attributed to hefty increases in raw material costs. Compared to FY16, the average natural rubber latex and nitrile latex prices in FY17 increased 46.4% and 11.9% respectively. Nonetheless, on QoQ basis, average natural rubber and nitrile prices had declined 21.3% and 26.4% correspondingly.

• On 13 October 2017, the group announced the signing of a letter of intent to purchase the entire ordinary shares of Eastern Press Sdn Bhd, a printing and packaging materials manufacturer, with a consideration of RM47.25mil. The proposed acquisition would allow it to improve its supply chain management, cost efficiency and quality control.

• Going forward, Top Glove’s earnings is expected to be anchored by a capacity-led growth. We estimate revenue to grow by 15% in FY18, underpinned by a 13% increase in production volume. Factory 31 and Factory 32 are slated to commence operation by March 2018 and December 2018 respectively. This would raise the annual production capacity from 51.9bil in FY17 to 59.7bil pieces of gloves in FY18. Meanwhile, its condom manufacturing facility is expected to be operational in 2018.

• The management targets to expand its market share from 25% to 30% by 2020. Besides organic growth, the group reiterates its interest in M&A as an expansion means. While maintaining gloves as its core business, the group plans to venture into other related industries.

• The global demand for rubber gloves is expected to remain healthy with an annual growth rate of 8%-10%. We believe the operating environment will remain challenging in FY18F, with earnings risk stemming from: (1) strengthening of the MYR against the USD; and (2) higher cost pressure (i.e. higher labour cost, increase in gas tariff and chemical prices).

• We continue to like Top Glove for its carefully crafted expansion plan, focus on quality, and continual efforts in enhancing operating efficiency through increased automation. However, we believe the current share price has very much priced in Top Glove’s fundamentals. Maintain HOLD.

Source: AmInvest Research - 16 Oct 2017