Results

• 1HFY16 revenue of RM1,494m was translated into core net profit of RM229.2m (+100.6% yoy), accounting for 54.4% and 56.3% of HLIB and consensus full year estimates, respectively.

Deviations

• We deem the earnings broadly in line with our expectation as 1QFY16’s earnings was exceptionally high due to strong USD and we expect 3QFY16 and 4QFY16 to be similar to current quarter’s earnings.

Dividends

• None (2QFY15: none).

Highlights

• 1HFY16 revenue increase +31.1% yoy on the back of +15.5% improvement in sales volume, particularly from nitrile (+51%), latex powdered free (+22% yoy) and vinyl (+24%), but partly offset by lower ASP and higher natural gas price yoy and qoq.

• Sales volume by geographical segment shows that volume from Europe improved to 33% from 27% in 2QFY15, largely attributable to increasing orders in nitrile glove. However, volume from Latin America dropped to 10% from 15% in 2QFY15 mainly due to economic slowdown in some countries (e.g. Brazil and Argentina).

• EBITDA margin for 2QFY16 improved to 21.3% from 15.6% in previous year, thanks to more efficient production lines, stronger USD and low raw material environment. To note, average latex price for 2QFY16 – declined by 5% yoy while average nitrile latex fell by 7% yoy.

• Raw material prices continue to trend lower with latex prices declining to RM3.45/kg (-13% qoq) and nitrile prices to USD0.96/kg (-7% qoq).

• On the proposed Secondary Listing, we are neutral to slightly positive as it will enable Top Glove to trade its shares in multiple currencies. This gives the company more liquidity as well as more avenues to raise capital in the future.

• We do not expect any earnings dilution on Top Glove as the proposed Secondary Listing will not involve any issuance of new shares by the company.

• Based on last closing price of RM5.20 per share and assuming the RM59.4m shares will be disposed by Tan Sri Dr Lim Wee Chai, his shareholdings will be reduced slightly by 0.91% (currently at 29.4%).

Risks

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

Forecasts

• No change in forecasts.

Rating

BUY , TP: RM7.51

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

Positives

• - Gradual shift to nitrile gloves, China’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 an unchanged TP of RM7.51, 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 - 17 Mar 2016