Results

• 9MFY16 core profit of RM293m was translated into core net profit of RM293.2m (+52% yoy), accounting for 75% and 73% of HLIB and consensus full year estimates, respectively.

Deviations

• We deem the earnings in line with our expectation as we had already adjusted downward our earnings forecast last week on time lag effect of ASP adjustment with rising cost and weakening USD.

Dividends

• Declared first interim dividend of 6 sen.

Highlights

• 3QFY16 revenue increased slightly by 1.7% YoY but fell 3% QoQ. This is on the back of sales volume growth of 11% YoY and 5% QoQ offset by lower average selling price. Nitrile segment continued to perform with volume growth of 20% YoY and 5% QoQ.

• However, core PATAMI in 3Q FY16 fell by 23% YoY and 41% QoQ. The weaker result was largely due to time lag effect (circa 2 months) on cost pass through to customers as latex price had spiked up 29% QoQ while US dollar had depreciated by 6.5%.

• We expect latex price to ease and stay low as winter season had come to end and the oversupply situation remains due to substantial planting in 2008-2012 period. Meanwhile, demand from China softened as its vehicle sales growth slowed down from 8% to 4% in 2015.

• Ringgit has appreciated by 6.5% (QoQ) against USD to average RM4.00/US$ in 3QFY16 due to rising in crude oil price and more dovish Fed on rate hike. Currently, we have conservatively factored in RM3.80/US$ in our FY16 and FY17 assumptions even though ringgit has recently weakened to above RM4.00/US$.

• With easing latex costs and upward revision in ASP, we expect improvement in 4QFY16. Topglove remains our only BUY call in the sector given undemanding valuation which trading at only 16x CY16 P/E versus peers at 18x CY16 P/E.

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: RM6.08

• 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 an unchanged TP of RM6.08 based on an unchanged P/E multiple of 18x CY17 EPS.

Source: Hong Leong Investment Bank Research - 16 Jun 2016