• Top Glove’s FY17 PATMI of RM332.7m was inline with ours and consensus estimates making up 96% and 98% respectively.

• While FY17 revenue grew 18% on higher sales volume and ASPs, PATMI fell -7.8% due to higher raw material prices.

• Top Glove plans to purchase 100% equity of Eastern Press SB for RM47.25m to enhance its supply chain.

• We raised FY18 and FY19 forecasts by 11.4% and 14.8% respectively on higher sales volume expected. Maintain HOLD with a new TP of RM6.50 (from RM5.55). Accumulate on dips.

Earnings drag down by lower margin despite high sales

Top Glove’s FY17 revenue grew 18% YTD on higher ASPs and sales volume (+7%). However, PATMI though inline with our forecast, fell 7.8% YTD due to higher average raw material price in FY17 vs FY16 (NR latex: +46%; Nitrile: +12%). YTD EBITDA margin dropped 4ppts.

Improved sales volume QoQ

Revenue grew +3.8% due to exceptionally high sales volume growth of +14% qoq. This was attributed to increased demand from all regions and replenishment exercise by customers, as some orders were put on hold (due to higher raw material prices) in 3QFY17. Also, sale volume rose as additional capacity came on stream.

Bright prospects on rising global demand and stable latex price

Moving forward global demand for rubber gloves is expected to grow at an average of 8-10% p.a. Additionally, there is increased demand from China as authorities tightened regulations on manufacturing of vinyl gloves to address pollution hazard. Current latex price had also stabilized at c.RM5.00/kg compared to its 5-year peak of RM8.18/kg in Jan 2017. We believe this eases cost pressures on rubber glove manufactures and stable margins in the near to medium term.

Forecast upgrades on higher sales volume and lower latex price

We raised FY18 and FY19 earnings forecast to RM388.6m (+11.4%) and RM412.6m (+14.8%) respectively, on higher revenue growth from stronger sales volume expected and new production capacity. By Dec 2018, the group expects to boost total production to almost 60 billion gloves p.a. (currently 48 billion pieces) with commissioning of 3 new factories (F30, F31 & F32).

Maintain HOLD with TP of RM6.50

We raised our TP to RM6.50 (from RM5.55) based on average 3-years PER of 21x over FY18 EPS on higher earnings. We like the stock for its sound fundamental and earnings prospect. Accumulate on dips.

Source: BIMB Securities Research - 16 Oct 2017