Investment Highlights

• We raise our FY18-20F forecasts by about 3% each, increase our FV to RM6.36 (from RM6.22) and maintain our HOLD call. This follows the change in FY18F effective tax rate assumption from 18% to 15%. Our FV is based on 20x revised FY18F EPS.

• Global glove demand is expected to remain healthy with an annual growth rate of 8%-10%. In FY18F, revenue is poised to grow by 15% on the back of a 13% increase in output volume. Factory 31 and Factory 32 are anticipated to be operational in March 2018 and Dec 2018 respectively. This will contribute an additional 7.8bil pieces of glove p.a., bringing the 2018 annual production capacity to 59.7bil pieces of glove. Meanwhile, the condom plant is slated to open in 2018, with 2 production lines in the initial phase. It is targeted to have 20 production lines within 2 years, with a production capacity of 1bil condoms p.a.

• We estimate net profit margin to be relatively unchanged at 10% in FY18F. We believe effective tax rates would stay low at ~15% in FY18-20F. Management highlighted that even with the government’s withdrawal of the reinvestment allowance in 2019, the group will be able to sustain the low effective tax rate through the availability of R&D tax incentives, utilization of unutilized allowance and internal tax planning.

• Compared to 2016 (June calendar year-end), Top Glove Malaysia ‘s (TGM) glove export rose by 7.9% in 2017, which was 2.9% lower than Malaysia’s 2017 glove export growth. This was attributed to the - 1.8% YoY growth in TGM’s natural rubber (NR) glove export (vs. Malaysia: +2.3% YoY), which partially offset its strong +23.5% YoY growth in nitrile-butadiene rubber (NBR) glove exports (vs. Malaysia: +17.4% YoY). TGM’s negative growth in NR glove export was attributed to the shift of NR glove production from Malaysia to Thailand due to cost advantage in Thailand.

• Going forward, the group plans to: (1) expand NBR glove production capacity, in tandem with rising global demand in NBR glove segment; (2) improve sales volume for surgical gloves; (3) increase production capacity for TPE/CPE gloves, which are currently in an oversold position; (4) venture into other related industries; and (5) tap into niche market which commands better margins.

• Management guided for RM300mil capex in FY18F (vs. FY17: RM447.1mil). The group aims to increase its market share from 25% to 30% by 2020. Besides organic growth, management reiterated its interest in M&As as an expansion means, and guided that there will be more M&As in next few months.

• The proposed acquisition of Eastern Press Sdn Bhd is expected to be completed in Feb 2018. This should improve the group’s supply chain management, and could potentially result in cost savings of RM4.5mil (1%-2% of FY18F earnings).

• In FY18, we expect the low raw material costs to bode well for Top Glove. Nonetheless, earnings risks could arise from: (1) strengthening of the MYR vs. USD; and (2) higher cost pressure (i.e. higher labour costs, 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.

Update on regional operations

• In Thailand, besides NR glove production, the plant is now capable of manufacturing NBR gloves. North America remains the main export market. The group expects the plant to have chlorination process, which is another way of producing latex powder-free gloves. This should extend the scope of producing gloves that are suitable for the European market.

• In China, the government’s ban on the usage of coal-fired boiler has caused a significant reduction in the number of vinyl glove producers. The supply shortage has been spurring growth in Top Glove’s sales volume. We expect the strict environmental regulations in China to continue in future, and should augur well for Top Glove.

• Management viewed the decline in sales in Latin America to be temporary. Sales is expected to bounce back following the economic recovery in Brazil and Columbia.

• Recall that Hurricane Irma had caused a sharp hike in price of butadiene, an important material in nitrile latex production. Currently, butadiene price is on a downward trend and is expected to normalize in November.

Source: AmInvest Research - 19 Oct 2017