Results

• 9MFY08/15 revenue of RM1.8bn (+6.2% yoy) was translated into adjusted PATAMI of RM193.5m (+32.0% yoy).

• Although revenue came in below expectation, adjusted PATAMI turned out in line, accounting for 82.1% and 91.2% of HLIB and consensus full year estimates, respectively.

• One-off adjustments for forex gain of RM7.9m in 2Q15 and RM7.0m in 3Q15, and forex loss of RM1.3m in 3Q14.

Deviations

• Improved efficiency and margins as well as stronger than expected USD against MYR.

Dividends

• Declared a first single tier interim dividend of 8 sen per ordinary share payable on 15 July 2015.

Highlights

• Sales volume for 9M15 improved by 6% on the back of improvement in latex powdered (+9% yoy), nitrile (+18% yoy) and surgical (+2%); coupled with positive impact from USD, which more than offset the impact of lower ASP.

• Apart from favourable currency and raw material prices, Top Glove has reported a record high result due to higher efficiency of its production lines which in turns lead to improved margins for both nitrile and natural rubber glove.

• 9MFY15 EBITDA margin of 15.9% is all time high since Top Glove was listed in 2001. It’s latest factory recorded 4.10m pcs glove per employee, compared to 3.18m and 2.82m pcs glove per employee in FY13 and FY14. Management also shared that utilization has improved to above 80%, higher than our conservation assumption of 75%.

• We note that in comparison with previous quarter, labour cost for natural rubber glove and nitrile glove has come down by -8% and -6% respectively.

• For expansion plan, F27 is delayed to Jan’16 (previously guided Dec’15) while F30 is also delayed to Dec’16 (from Sep’16). Management explained that the delays are due to reconfiguration on production lines to enhance efficiency.

• On recent natural gas hike, we were told that the impact will not be significant (less than 1%) and management has yet to pass the hike to customers.

Risks

• (1) Further reduction in ASP; (2) Surge in nitrile and latex prices; and (3) Weaker USD against MYR.

Forecasts

• We made changes in our model to factor in production capacity as per guidance as well as higher USD rate. As a result, EPS for FY15-17 are raised between 6-24%.

Rating

BUY, TP: RM6.62

Positives

• Gradual shift to nitrile gloves, China’s operations turned around, cost reduction through efficiency.

Negatives

• Will experience lower net profit margins when compared to peers due to low exposure in nitrile latex gloves and PF NR gloves.

Valuation

• We lifted our TP from RM5.42 to RM6.62 post earnings upgrade. Since potential total return to our new TP and projected yield is 16.0%, we upgrade the stock from HOLD to BUY. Moreover, with improved margin (to record level) as well as the discount valuation gap to peers, Top Glove is now our preferred pick of the sector.
• Our valuation is pegged to unchanged multiple of 15.4x CY16 EPS based on 3-year historical average P/E.

Source: Hong Leong Investment Bank Research - 18 Jun 2015