Highlights

• We came back from Top Glove FY15 briefing feeling positive due to its exciting prospects going forward.

• We reiterate our views that Top Glove will continue to benefit from favourable environment both internally (improved efficiency) as well as external tailwinds (appreciation of USD and low raw material prices).

• We learnt that its latest factory is currently able to produce 40,000 pcs per hour, narrowing its gap with Hartalega’s NGC of 45,000 pcs per hour. In addition, annual glove production per employees has improved from 4.1m pcs to 4.3m pcs sequentially.

• Its China operation recorded PAT of RM4.2m in FY15, mainly achieved after its consolidating two factories into one. In FY 2014, China operation recorded RM9.8m loss.

• Management shared that its payout ratio for FY15 (44%) fell below its dividend policy of 50% after considering cash balances as well as its planned M&A exercise. They also indicated that payout ratio for FY16 will be normalised to at least 50% of PATAMI.

• Product mix by sales has been trending upwards for nitrile glove (28% in FY15 vs. 24% in FY14). We believe this will continue to be the case and Top Glove will continue to tap into nitrile glove segment. Data from Malaysian Rubber Export Promotion Council shows that export of nitrile glove to US in 1H15 by Malaysia has been growing at +38% yoy, compared to China and Thailand of +1.3% and -28.2% respectively.

• Management confidence with planned capacity expansions and acquisition exercises, Top Glove will be able to command 30% global market share in 2020 (currently 25%).

Risks

• Further reduction in ASP amid steep competition.
• Surge in nitrile and latex prices.
• Weaker USD against MYR.

Forecasts

• We factor in higher USD rate in our forecast (from 3.60 to 3.70 based on FY15 average) which in turn results in our EPS for FY16-18 lifted by 13-17%.

Rating

• BUY , TP: RM10.98

Positives

• Gradual shi ft to nitrile gloves, Chi na’s operations turned around, improved production efficiency, cost reduction via product line automation and SAP ERP system.

Negatives

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

Valuation

• We lifted our TP from RM9.49 to RM10.98 post earnings upgrade.
• Our valuation is pegged to unchanged multiple of 20x CY16 EPS based on +2SD above its 3-year historical average P/E (similar to Kossan). This is also in-line with FY16 P/E of Hartalega and Kossan.

Source: Hong Leong Investment Bank Research - 21 Oct 2015