• Top Glove’s 1HFY18 PATMI of RM214.5m makes up 50% of our full year forecast. Given that Aspion will start contributing from 2HFY18, we consider this results as above our expectations.

• 1HFY18 PATMI grew 37% on higher ASPs and sales volume (+19%).

• Outlook remains positive supported by increasing global demand, additional capacity coming on stream in FY18 and FY19 as well as earnings accretion from Aspion.

• We raised FY18/19/20 forecasts by 5%/7%/7% respectively on higher expected sales volume and higher margins assumptions. Maintain BUY call with new TP RM11.40.

Strong performance supported by all-time high sales volume

The group recorded strong 1HFY18 revenue of RM1.896.6m (+15.8% yoy) on higher ASPs and strong sales volume (+19%) mainly due to strong global demand as well as from additional capacity. Sales volume growth came from emerging markets, particularly Asia ex Japan (+60%), and Eastern Europe (+40%). Consequently, PATMI increased 37% due to higher sales, cost efficiency as well as lower raw material prices (NR: -26% yoy; NBR: -1.9% yoy). As a result, profit margin increased 1.7ppts to 11.3%.

Higher qoq performance despite shorter working period

On qoq basis, both revenue and PATMI increased 2.2% and 3.4% respectively. The higher performance was attributed to the improvement in production efficiency, coupled with new capacity coming on-stream and strong demand growth which saw sales volume grew by 3%, despite shorter working period in 2Q.

Outlook remains positive on organic and M&A growth

Global demand is expected to remain strong from greater hygiene and healthcare awareness. Moving forward, Top Glove’s earnings growth is expected to be driven by expansion plan, ie factory 31 and 32 (refer table 2), as well as contribution from Aspion (completion by early April 2018) which is estimated to command higher margin. Current latex price has also stabilized at c.RM4.60/kg (-44% yoy) compared to its 5-year peak in Jan 2017. Low raw material price bodes well for Top Glove which will mitigate the recent appreciation of ringgit and other cost pressures.

Maintain BUY with higher TP of RM11.40

We raised our FY18/19/20 earnings forecasts to 5%/7%/7% respectively as we impute stronger sales volume projection and higher margins from better economy of scale. We maintained BUY recommendation with new TP of RM11.40 (from RM10.40) based on unchanged 26x PER (+2SD above 3-years historical mean) applied to FY19 EPS. We remain upbeat on Top Glove for its dynamic organic and inorganic expansion plans and enhancing operating efficiency through increased automation.

Source: BIMB Securities Research - 16 Mar 2018