• Top Glove (TG) 2QFY19 PATAMI fell 4% qoq to RM105.8m on lower sales as ASPs dropped on pricing pressure and lower cost pass through.

• 1HFY19 PATAMI was flat (+0.6% yoy) due to higher interest cost and effective tax rate despite increase in sales by 27.7% yoy.

• We revised down earnings for FY19/FY20 by 10.5%/12% respectively to account for lower ASP, slight capacity delay and higher operating cost. Our long-standing Sell is upgraded to Hold, with new TP RM4.20, as share price has fallen significantly.

QoQ earnings dragged by lower ASPs

TG’s 2QFY19 revenue and PATAMI fell by 8% and 4% qoq respectively. The decline in revenue was majorly due to lower ASP on cost pass through of lower raw materials cost and partially to pricing pressure. On the other hand, strengthening of MYR vs USD as well as increase in other costs were mitigated by lower average prices of NR (-4.2% qoq) and NBR (-14.3% qoq). Hence, EBITDA margin was stable at 16.6% (+0.2ppt qoq).

Flat 1HFY19 impacted by higher interest cost and tax rate

Revenue 1HFY19 rose by 27.7% yoy due to stronger sales volume (+18%) supported by improving emerging market demand and market share gains in the various non-medical segments. However, PATAMI of RM215.8m was flat (+0.6% yoy) due to higher interest cost from M&As funding and higher effective tax rate of 18.3% (vs 1HFY18: 12.4%). Higher effective tax rate was due to reduction in tax allowance and provision of deferred tax liabilities. Overall, 1HFY19 PATAMI was below our and consensus estimates at 43.5% and 42.8% respectively.

Cautious outlook on rising competition

TG is expected to ramp up its expansion plan mainly on nitrile glove to 80.9bn p.a (+34%) by end 2020. We are cautious on higher competition from incoming nitrile additional capacity which may cause ASP to come under pressure. Additionally, the weaker USD outlook would add pressure in the near-term. On higher operating cost (min wage and rising raw material prices) we believe this could partially mitigate by automation, cost pass through mechanism and efficiency.

Earnings revised downward

We reduce our earnings forecast for FY19/FY20 by 10.5%/12% respectively to account for lower ASP and slight delay in expansion plans of Factory 32 as well as higher operating cost than expected. EBITDA margin to remain stable at 17% as we expect Aspion (premium margin surgical glove) could turn profitable in 2H19. However, we expect earnings contribution to be small in the near-term.

Upgrade to Hold with lower TP RM4.20 (from RM5.00)

We have derived a new TP of RM4.20 following the earnings revision and lower PE of 24x (previously 26x). Our implied target PE is based on the sector’s 5-year forward historical mean, and to compensate for the industry oversupply risk. Given downside of 5% based on our TP – coupled with a 21% decline in share price YTD – we upgrade our call to HOLD from SELL.

Source: BIMB Securities Research - 25 Mar 2019