Highlights

• We attended TopGlove 4QFY16 analyst briefing and walked away feeling neutral.

• Result recap: 4QFY16 net profit improved by 5% QoQ mainly due to upward revision in ASP by 6.7% but offset partly by higher latex price (+11%), minimum wage hike (+7%) and natural gas hike (+3%).

• 4QFY16 sales volume grew by 4% YoY mainly driven by latex powder free (+16%) and nitrile (+10%) but partly offset by latex powdered (-18%). Utilization for nitrile is at maximum level while latex glove at 80-90%. Nitrile as percentage of total product mix has increased from 28% in FY15 to 32% in FY16 and Management expected the upward trend to continue.

• QoQ, ASP has been revised upward across all segments (nitrile +5%, latex powder free +8.3%, latex powder +3.1%) to reflect the rising raw material and production costs. We understand that ASP has remained stable in August September period.

• Average latex price had climbed up recently from RM4.2/kg to RM4.87/kg while average nitrile price remained stable at below $1/kg. Company has been talking to customers on the ASP revision to reflect the rising raw material price.

• After factoring in the rising cost and passing the saving from USD to customers, we expect EBITDA margin to normalise to 15-16% level (as compared to >20% from 4QFY15 to 2QFY16).

• Currently, we have conservatively factored in RM4.00/US$ in our FY17 and FY18 assumptions even though ringgit has recently weakened to RM4.20/US$.

• The company plans to increase its total capacity by 26% in next 2-3 years with 90% of such capacity expansion in the nitrile segment. With TopGlove aiming to become the largest nitrile glove maker in the world, we expect pricing competition to heighten in the nitrile segment.

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

HOLD, TP: RM4.91

• We still like TopGlove for its exposure in resilient export market (in view of rising protectionism in global trade) and potentially benefiting from strong USD on higher likelihood of Fed rate hike.

Valuation

• Maintain HOLD with an unchanged TP of RM4.91 based on an unchanged P/E multiple of 18x CY17 EPS.

Source: Hong Leong Investment Bank Research - 19 Oct 2016