Highlights

• We attended Top Glove Corporation Berhad 1QFY16 briefing and came back feeling positive on 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).

• 1QFY16 sales volume (quantity sold) recorded an all -time high with significant growth of 15% yoy. We were guided that sales volume for FY16 could sustain at 10%-15% growth.

• Product mix by sales has been trending upwards for nitrile glove (32% in 1QFY16 vs. 28% in FY15). We believe this will continue to be the case and Top Glove will continue to tap into nit rile glove segment. The company has been registering an incremental nitrile volume growth of 646% for the past 6-year period.

• Management guided that full year utilization rate for FY16 could sustain at 80% (vs. 76% previously) as the company will continue to employ advanced technology. Further increase in automation throughout the production process can be expected to reduce workers and improve product quality and process efficiency.

• Demographically, Europe and North America remained as key regions. Contribution from both regions stood at 60% for 1QFY16 (vs. 57% in 1QFY15). Moreover, contribution from Europe region continues to grow from 26% (1QFY15) to 31% (1QFY16) with additional nitrile glove sales.

• The company’s 1QFY16 net cash improved to RM366.1m (vs. RM186.7m for 1QFY15). Balance sheet remained healthy as strong net cash is equivalent to 4.2% of market price.

• Management guided that it expects to acquire at least one company per year in order to sustain its leadership position.

Risks

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

Forecasts

• Unchanged.

Rating

• BUY , TP: RM16.38

Positives

• Gradual shift to nitrile gloves, turnaround in China’s operations, improved production efficiency, cost reduction via product line automation and SAP ERP system.

Negatives

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

Valuation

• We maintain our TP at RM16.38 and BUY recommendation on the equity.
• Our valuation is pegged to multiple of 19.9x CY16 EPS based on +2SD above its 3-year historical average P/E.

Source: Hong Leong Investment Bank Research - 7 Jan 2016