• We attended Top Glove’s analyst briefing and were given insight into its recent developments.

• Latex price is on downtrend; therefore we expect stable margins in short to mid-term.

• New capacity coming on-stream to boost future earnings

• We made no changes to our FY17 and FY18 earnings forecasts.

• Target price is unchanged at RM5.55. Maintain HOLD. Latex price on downtrend.

Latex price began its downtrend after reaching its 5-year peak of RM8.18/kg in January 2017 to about RM5.50/kg yesterday (Figure 1). Latex accounts for about 50% of production costs of natural rubber gloves. Hence, we believe this will provide more breathing space for rubber glove manufacturers and expect margin to remain stable in the next 3-6 months.

New capacity coming on-stream. Construction of a new facility, F30 (Klang) is almost completed and is expected to commence production by July 2017, according to management. Meanwhile, additional new facilities in Klang, F31 and F32 will respectively commence operations by January 2018 and December 2018. Upon completion, these 3 factories will boost the Group’s total number of production lines by an additional 106 lines and production capacity by 10.6bn gloves per annum.

Acquired new company

In May 2017, the Top Glove also acquired 2 glove factories (F33 & F34) located in Nilai and Muar with a combined production capacity of 1.1bn gloves per annum. These acquisitions are in progress and targeted to be completed by August 2017, and expected to pave the way for greater access to the China market. By December 2018, together with F30, F31 & F32, the Group is projected to have a total production capacity of almost 60bn (Figure 2) gloves per annum (versus 48 currently).

Maintaining our forecasts. We made no changes to our FY17 and FY18 earnings forecasts at RM318.9m and RM348.9m 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 RM5.55 based on a rolling average 5-year PER band of 20x over CY17 EPS. The stock does not offer much upside; hence we maintained our HOLD recommendation and advise investors to accumulate at lower level.

Source: BIMB Securities Research - 22 Jun 2017