Results

• Below Expectations: 9MFY17 PATAMI came in at RM234.1m, accounting for 68.1% of ours and 66.9% of consensus estimates, which we deem to be below expectations.

Deviations

• The sub-par results are due to the time lag in the passing on of price increase, as raw material prices crept upwards in the quarter under review.

Dividends

• Declared first interim dividend of 6 sen a share, representing a pay-out of 32%.

Highlights

• YTD: Revenue grew 15.7% yoy on volume growth (+5%) whilst PATAMI declined 21% yoy due to higher raw materials costs.
• YoY: Revenue grew by 29.4%, on the back of a higher ASP (+19%) due to the surge in raw material prices yoy (NR Latex: +79.2%, Nitrile: +41.1%). However, volumes declined (-1%) as customers subsequently held back their orders. Consequently, PATAMI grew by 24.4% yoy.
• QoQ: Revenue grew by 2.1% whilst PATAMI eased by 6.4% on the back of lower volume (-5%) due to the steep revision of ASP mid 2QFY17. EBITDA margin eased to 12.4% from 14.2% qoq as the ASP revision wasn’t able to fully offset the higher raw material prices qoq (NR Latex: +18.8%, Nitrile: +24.1%).
• We can expect bulk of the effect of the ASP revision in 3Q17 (c. +9% qoq, c. +19% yoy) to be quantified in 4Q17. Furthermore, the price of raw materials NR Latex and Nitrile has tapered off significantly since May.
• With the revision in ASP, stable USD and lower raw material prices going forward, we can expect EBITDA margin to recover to the 14-15% level in the coming quarter (FY16: 17%). Given that raw material prices have recently corrected, we also expect volume to rebound in 4QFY17.
• As for its capacity expansion plan, the commissioning of Factory 30 (Klang) is delayed to July, from the earlier guidance of May due issues relating to gas pipes. Whilst Factory 31 is delayed to January 2018 from November 2017.
• In May the group acquired 2 glove factories in Nilai and Muar with a combined total capacity of 1.1bn gloves, which are expected to be completed by August. These two factories have been earmarked specifically for the China market.

Risks

• Reduction in ASP amid steep competition; continued surge in nitrile and latex prices; and Weaker USD against MYR.

Forecasts

• We adjust our forecast downwards on the back of lower than expected volumes. Our FY17/18/19 EPS decreases by 4%.

Rating

HOLD ↔ , TP: RM5.49 ↔

• We still like Top Glove for its exposure in the resilient export market (in view of rising protectionism in global trade) and it being a benefactor of the strong USD.

Valuation

• Maintain HOLD with a lower TP of RM5.20 (from RM5.49) based on an unchanged P/E multiple of 18x CY18 EPS.(+0.5std deviation above mean).

Source: Hong Leong Investment Bank Research - 19 Jun 2017