• Top Glove (TG) 3QFY19 PATAMI fell 29.4% qoq and 36.5% yoy to RM74.7m due to surge in natural rubber latex prices, time lag in selling prices revision, competition and negative contribution from vinyl glove.

• An interim DPS of 3.5sen was declared (vs 3QFY18: 3.5sen) which within our expectation, implying a 21% payout.

• We revised down earnings for FY19/20/21 by 6.5%/5%/5% respectively to account for higher operating cost than expected and time lag of cost pass through. Despite this, 4QFY19 results expected to improve and long term prospect remains promising.

• Maintain HOLD with new TP of RM4.92 based on 27x PER and roll forward to FY20 EPS.

Below expectation

TG’s 9MFY19 PATAMI of RM290.5m (-12.5%) was below our and consensus forecast at 65% and 63% respectively. Overall, results were impacted by higher natural rubber latex prices, time lag in selling prices revision and stiffer competition.

3QFY19 earnings mostly impacted by surge in latex prices

TG’s 3QFY19 revenue increased to RM1.2bn (+2.6% qoq, +8.1% yoy). This is due to overall higher sales volume (+2% qoq, +9% yoy) coming from North America, Eastern Europe and Asia mitigating the drop in ASPs especially in nitrile glove due to higher competition. However, PATAMI slipped to RM74.7m (-29.4% qoq, -36.5% yoy) due to i) sharp upward movement in the natural rubber latex prices (c.-22%), ii) time lag in selling price as well as iii) partly impacted by vinyl glove sales in China due to competition and oversupply. Hence, PATAMI margin eroded to 6.3% (- 2.8ppt qoq, -4.4ppt yoy).

Earnings revised downward

We reduce our earnings for FY19/20/21 by 6.5%/5%/5% respectively to account for higher raw material prices and time lag of cost pass through.

Long term outlook remains promising

We expect TG’s 4QFY19 results to improve on better margins due to NR glove ASPs upward revision from May 2019 onwards. Long term prospect remains promising due to i) growing global demand supported by TG’s planned capacity expansion to 83.3bn p.a (c.+37%) by end 2020 (refer table 2), ii) improved product quality as well as innovation, and iii) continued cost efficiency effort. On overcapacity concern, we expect it to be temporary with oversupply cycle lasting about 6-9 months. Furthermore, TG will closely monitor the developments to ensure its expansion plans are aligned with the demand and supply situation.

Maintain HOLD with new TP RM4.92

Following our earnings revision and rolling forward valuation to FY20 EPS, we have derived new TP of RM4.92 (from RM4.20). Our implied target PE is 27x (1SD of its 5-yrs historical forward mean). This is fair given its position as the world’s largest glove maker as well as potential growth from expansion in organic and inorganic.

Source: BIMB Securities Research - 19 Jun 2019