• Top Glove’s 1QFY19 PBT fell to RM141.9m (-4.1% qoq) due to lower vinyl glove profit contribution and higher operating expenses

• PATAMI grew 4.4% yoy mainly due to stronger sales (+34.5%) despite margin declining by 2.5ppts on higher expenses.

• Downgrade to sell with unchanged TP RM5.00 based on 26x PER. We are cautious on higher competition from robust additional capacity in the industry which may impact earnings.

Decline in PBT caused by weaker vinyl glove sales

Top Glove 1QFY18 PBT fell by 4.1% qoq to RM141.9m mainly due to lower contribution from vinyl glove segment due to higher competition. Moving forward, we expect Top Glove’s sales of vinyl glove to remain weak due to revival of China’s vinyl glove production and insignificant impact of US-China trade war on its glove industry. PBT margin also declined by 0.9ppts to 11.2% due to overall higher operating expenses.

Higher yoy and in-line with expectation

Revenue rose by 34.5% yoy due to stronger sales volume (+19%) supported by strong global demand as well as additional capacity. However, PATAMI only increased by 4.4% due to higher interest cost from M&As funding, organic expansion and higher effective tax rate. Additionally, lower natural rubber latex prices (-24% yoy) was offset by higher nitrile latex prices (+24% yoy). As a result, PBT margin dropped 1.8ppts. Overall, FY18 PATAMI was in-line with our and consensus estimates at 22% and 21% respectively.

Cautious outlook on rising competition

Top Glove is expected to ramp up its expansion plan mainly on nitrile glove to 75.3bn p.a (+24%) by end 2020. Going forward, we are now cautious on higher competition from incoming nitrile additional capacity in the industry which may cause ASP to come under pressure. Additionally, we believe that the cost savings from current lower raw materials price might be partially offset by increase in other costs, such as impending increase in minimum wage effective January 2019.

Downgrade to SELL with TP RM5.00

We downgrade our call to SELL with an unchanged TP of RM5.00 (based on PE of 26x), as share price has seen strong appreciation in the past months due partly to its inclusion in the KLCI in our view. With no major structural business developments envisaged, coupled with greater competition from increasing capacity in the glove industry, we may see ASP under pressure, hence placing earnings at risk in the medium term. Together with potential lower contribution from Aspion and rich valuations at 29.6x FY19 EPS we believe Top Glove is fully-valued at this juncture.

Source: BIMB Securities Research - 18 Dec 2018