• 1QFY17 PATMI of RM73.3m is within our expectation, making up 24% of our full year forecast, however it was below consensus estimates which only made up 20%.

• 1Q revenue declined by 1.8% while PATMI fell 42.9%.

• EBITDA margin were lower at 15.0% vs. previous year’s 23.8% but higher than qoq’s 14.3%.

• We maintained our FY17 and FY18 earnings forecasts respectively.

• Target price is unchanged at RM5.50. Maintain HOLD.

Lower yoy earnings. 1Q revenue declined by 1.8% while PATMI fell 42.9% due to the lower average selling price (by about 5%-6%); higher operating costs; and weaker USD during the quarter as compared with previous year. Nonetheless the PATMI is inline with our forecasts.

Lower margins. EBITDA margin was lower at 15.0% vs. previous year’s 23.8% but higher than qoq’s 14.3% due to the abovementioned reason.

Weakened ringgit positive to glove producers. We believe Top Glove will benefit from the weak MYR/USD as sales are denominated in USD. The ringgit has weakened to RM4.45/USD presently and our economist views that ringgit will average at about RM4.20-RM4.40/USD for 2017 (2016 averaging around RM4.10). Hence, we believe the ringgit depreciation will be able to offset the higher operating costs. With this, we expect margins to remain stable if not better in the coming quarters.

Maintaining our forecasts. We made no changes to our FY17 and FY18 earnings forecasts at RM311m and RM317m respectively. We believe earnings will remain stable in coming quarters as management has indicated sales order remains on an uptrend, accompanied by additional production capacity coming in stages.

Maintain HOLD. Our target price is unchanged at RM5.50 based on a rolling average 5-year PER band of 20x over CY17 EPS. The stock does not offer much upside; hence we maintain our HOLD recommendation.

New production facilities. The expansion of Factory 6 (Thailand) was recently completed while Factory 30 (Klang) is under construction and expected to commence production by April 2017. Concrete plans are also in place for Factory 31 (Klang), whereby Phase 1 will commence by August 2017 with a production capacity of 1.6bn gloves per annum and Phase 2, by May 2018, with a production capacity of 2.8bn gloves per annum, bringing the total production capacity to 4.4bn gloves per annum. By May 2018, the Group will have a total of 600 production lines and a production capacity totalling to 56.8bn gloves per annum.

Source: BIMB Securities Research - 16 Dec 2016