Investment Highlights

• Top Glove continues to benefit from regional demandsupply imbalance, as capacity addition is imminent against an opportune backdrop. We affirm our BUY call with a DCF-derived FV of RM11.96/share (WACC: 6.5% terminal growth: 2.5%). It implies a P/E of 25x CY19F. We believe premium valuations are justified by Top Glove’s ambitious yet deliberate expansion plan, sound execution and high earnings visibility (3-year earnings CAGR FY17- FY20 of 23.7%).

• Top Glove registered a 2QFY18 profit of RM109.0mil (QoQ: +3.4%, YoY: +31%), bringing 1HFY18 to RM214.5mil (YoY: +37%). It came above consensus forecasts, at 50% of estimates.

• Top Glove’s results key highlights included:

1. Robust volume demand arising from Asia (excluding Japan) and Eastern European regions saw 60% and 40% YoY growth respectively. It stems from supply disruptions in competing China-based glove producers, which are expected to persist in the near term.

2. The surge in demand was met by: i) an enlarged production capacity ~8%, post acquisition of A1 Glove and Titi Glove in June 2017; and ii) utilisation rate raised to 90% for the quarter from the usual 80- 85%.

3. Meanwhile, ASPs were both 4% higher QoQ and YoY. It more than offset higher natural gas tariffs (22%) and foreign worker levy. These cost combined, consist close to 20% of production cost. Any revisions to cost are expected to have a neutral earnings impact to Top Glove through its cost-pass through mechanism.

4. Latex and nitrile prices continued to downtrend as well. Favourable confluence of factors resulted in EBITDA margins improving by 0.6ppt to 9.7ppt for 2QFY18. Weak demand from China, which accounts for ~40% of total Malaysia rubber exports, is expected to weigh on latex prices. That said, we expect latex prices to climb in 3Q in tandem the seasonally-low wintering period, lasting between February and May.

5. We expect 2HFY18 to drive earnings further. This will be aided by completion of the acquisition of Aspion (4.6bil pcs) by April, a fully operational Factory 31 (3bil pcs) by June and persisting advantageous market conditions. These capacity additions enlarge current volume capacity by 15%.

• Key risks to Top Glove include capacity delays and a weaker MYR. This report marks a change in analyst coverage as well.

Source: AmInvest Research - 16 Mar 2018