- We reiterate BUY on Top Glove Corp with a higher fair value of RM10.60/share (vs. RM9.85/share previously). This is based on an unchanged target PE of 21x on FY16F EPS.

- We came away from Top Glove’s post-result briefing and site visit (F25 and main R&D centre) yesterday more assured of the group’s prospects. We have raised our FY16F-FY18F earnings forecasts by 6%-8% following upward revisions to our utilisation rate (from 75% to 80%) and EBITDA margin assumptions (+1ppt to +2ppts).

- Valuation-wise, the stock appears to be attractive. It is currently trading at an FY16F PE of 18x – midway its 5-year PE band. With the US rate hike still on the horizon, we expect Top Glove’s valuation – and that of its peers – to overshoot in the near term. Its peers Kossan and Hartalega are presently trading at forward PEs of 26x and 28x.

- As we had earlier highlighted in our results note, the group’s record FY15 earnings of RM280mil (YoY: +55%) can be attributed to a 5.5ppt-expansion in its EBITDA margin, from 14% in FY14 to 19% in FY15.

- Key contributors to this include:- (1) increase in Top Glove’s sales volume backed by the strong demand (4QFY15 QoQ: +7%; FY15 YoY: +8%); (2) turnaround in its China operations from a loss of RM9.8mil in FY14 to a gain of RM4.2mil in FY15; (3) favourable product mix; (4) declining raw material prices; and (5) appreciation of the USD vs. the RM (YoY: +11%).

- While the exact split between the internal and external factors contributing to the margin expansion could not be determined, management guided for it to be at c.50:50. We further assume that the forex factor alone was 40% given that the bulk of the raw material savings was passed on to customers (ASP: -7% YoY).

- Interestingly, we also learnt that margins for NR gloves – the group’s core product with a 64% share – presently command higher margins (+2ppts) compared to NBR’s.

- While the group’s DPS for FY15 of 20 sen is its highest ever, the 44% payout was below its 50% policy. We understand that the stated policy is subjected to various clauses, including the company’s projected capex and M&A activities. Our FY16F-FY18F DPS forecasts are based on a 45% payout ratio and translate to an average yield of 2.8%.

- Other key takeaways from the briefing include the reduction in the tenure of its forward contracts to under 2 months from 6 months and 3 months previously, in view of the current volatility in the currency markets and management’s reiteration of its M&A interests.

Source: AmeSecurities Research - 21 Oct 2015