Highlights/ Comments

• Top Glove’s upcoming 2QFY16 results will be released on 16 March 2016.

• On YoY basis, we understand that 2Q earnings will come in stronger than last year’s RM56.2m thanks to stronger USD and lower raw material prices.

• However, on QoQ basis, 2Q results should see a slowdown in earnings growth from RM128.9m (which was the record high in history mainly on account of stronger USD) mainly due to strengthening of MYR.

• Recent share price retracement was triggered by the reversal in MYR trend. MYR strengthened against USD from RM4.41/US$ on 12 Jan 2016 to RM4.08/US$ on 11 Mar 2016.

• Going forward, the company’s core earning is unlikely to achieve another record high as macro conditions now support a stable and potentially stronger MYR. Meanwhile, Average Selling Price (ASP) is expected to continue to decline amid higher installed capacity.

• The expansion plans for Factory 27 in Lukut, Port Dickson (commencement by March 2016), Factory 6 in Thailand (commencement by August 2016) as well as the construction of a new facility, Factory 30 (commencement by February 2017) are expected to boost the number of production lines to 540 and capacity to 52bn gloves per annum by year-end FY17 (vs. current production lines and capacity of 484 and 44.6bn, respectively).

Risks

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

Forecasts

• Our FY16-17 core earnings forecasts are lowered by 3%-5% as we lower our ASP assumption given low raw material price environment.
• We note that the strong USD catalyst has diminished as ringgit is poised to maintain its strength given resilient economic fundamental. We already trimmed our ringgit assumption to RM3.80/US$ in our FY16-17 forecasts (vs. RM4.00/US$ previously).

Rating

BUY , TP: RM7.51

• From valuation perspective, Top Glove is still the most attractive rubber glove stock among our coverage.

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

• Maintain BUY with a lower TP of RM7.51 (previously RM8.04) post earnings forecast adjustments, based on an unchanged P/E multiple of 20.6x CY17 EPS, +1SD above its 5-year historical average P/E.

Source: Hong Leong Investment Bank Research - 14 Mar 2016