Results

• 1QFY16 revenue of RM800.2m was translated into core net profit of RM129.2m (+156.9% yoy, +33.6% qoq). This came in above ours and consensus expectations, which accounted for 37.9% and 40.2% of HLIB and consensus full year estimates, respectively.

Deviations

• Improved efficiency and margins; soft raw material prices; as well as stronger USD against MYR.

Dividends

• None (1QFY15: none).

Highlights

• 1QFY16 sales volume (quantity sold) recorded an all-time high with signi ficant growth of15% yoy; mainly coming from improvement in its nitrile segment (+54% yoy). Sequentially, sales volume grew by 7% from 4QFY15.

• EBITDA margin for 1QFY16 improved to 22.7% from 14.2% in previous year, thanks to more efficient production lines, stronger USD and lower raw material environment. To note, average latex price for 1QFY16 was up by +1.4% yoy whereas average nitrile latex fell by 7.2% yoy.

• Utilization rate during the quarter remain high at 80% (vs. 75% in 1QFY15) and we were guided that full year utilization rate for FY16 could sustain at 80% (vs. 76% previously). ASP for 1QFY16 declined by 8% yoy but flat qoq.

• To recap, the expansion plans for Factory 27 in Lukut, Port Dickson (commencement by February 2016) and Factory 6 in Thailand (commencement by August 2016) as well as the construction of a new facility, Factory 30 (commencement by February 2017) will boost the number of production lines to 540 and capacity to 52bn gloves per annum.

• At the upcoming AGM and EGM on 6 January 2016, Top Glove will present its proposed final and special single tier dividend amounting to 15 sen and bonus issue up to 630m new shares on the basis of one bonus share for every existing share.

Risks

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

Forecasts

• Our FY16-18 core EPS forecasts are raised by 45.2%- 54.3% to 79.69 sen – 91.03 sen respectively, to account for higher US$:RM assumption of RM4.00/US$ (vs. RM3.65 previously).

Rating

BUY , TP: RM16.38

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 raise our TP from RM10.98 to RM16.38 based on unchanged P/E multiple of 19.9x CY16 EPS, +2SD above its 3-year historical average P/E, which is justifiable given stronger USD against MYR; lower raw material prices; and improved production efficiency.

Source: Hong Leong Investment Bank Research - 16 Dec 2015