Highlights

• We attended Top Glove’s analyst briefing and walked away feeling neutral. Key highlights as below:

• 9MFY16 core PATAMI of RM293m already exceeded full year FY15 earnings and set to be another record high. After reported strong 1HFY16 earnings which was driven by strong USD and lower raw material costs, 3QFY16 core PATAMI fell by 23% YoY and 41 % QoQ.

• The weaker 3QFY16 result was attributed to time lag effect (circa 2 months) on cost pass through to customers as average latex price had spiked up 14% QoQ and US dollar had depreciated by 6% coupled with downward adjustment in ASP by 2%.

• We understand that ASP has been revised higher for June and July. Latex price had also eased to RM4.3/kg after climbing to recent high of RM5.1/kg. 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.

• Sales volume continued to grow by 11% YoY and 5% QoQ, mainly driven by strong growth in nitrile (+20% YoY and +5% QoQ). Nitrile latex price was relatively stable and hovered round USD0.95 to 1.00/kg but ASP of nit rile glove was under pressure due to intense competition. However, given the slowdown in capacity expansion, ASP has started to stabilise with an upward adjustment trend.

• With easing latex costs and upward revision in ASP, we expect EBITDA margin to improve from 13% back to 18-19% level in 4QFY16. Share price has overshot on the downside after the weak 3QFY16 result. Top Glove is trading at attractive valuation of 14.5x CY16 P/E, below 5 years average P/E of 16x and versus peers at 17x. The weaker 3QFY16 is temporary and earnings should recover with the adjustment in ASP and easing of raw material price.

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 shift 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 - 23 Jun 2016