Results

• Within Expectations: FY17 PATAMI came in at RM332.4m, accounting for 103% of ours estimates, which we deem to be inline but below consensus estimates at 94.9%.

Dividends

• Declared final interim dividend of 8.5 sen a share, bringing YTD dividends to 14.5 sen/share representing a pay-out of 54.6%.

Highlights

• YTD: Revenue grew 18.0% yoy due to higher volume (+7%) on the back of increased capacity, higher ASP as well as the stronger USD throughout FY17. Nonetheless, PATAMI declined 7.9% yoy due to higher raw material cost. To note, the average NR Latex and Nitrile Latex prices throughout FY17 were 46.4% and 11.9% higher than in FY16.
• YoY: Revenue grew by 25.0%, on the back of a higher volume (+13%) due to the enlarged capacity and increased sales across all operating regions. PATAMI grew 49.8% yoy to RM98.4m on the back of a lower effective tax rate (13% vs. 17%).
• QoQ: Revenue grew by 3.8% qoq as orders replenished from the vacuum in sales during 3Q17 owing to the steep increase in raw material prices. EBITDA margin expanded by 1.1 ppts to 13.5% from 12.4% qoq as volumes recovered and greater manufacturing efficiencies achieved. PATAMI grew 26.6% on the back of a lower tax expense pertaining to tax incentives.
• We can expect effective tax rate to dec rease to c.15% moving forward as the group draws down on its tax incentives. With the revision in ASP, stable USD and raw material prices going forward, we expect EBITDA margin to range between 14-15% in FY18.
• The groups expansion plans remain on track with F31 (March 2018) and F32 (December 2018) with an added capacity of 7.8bn pieces per annum expected to be operational as scheduled.
• Acquisition: Top Glove also announced that it had entered into a “term sheet” for the acquisition of the entire ordinary shares of Eastern Press Sdn Bhd, a major supplier of packaging material to the group. The indicative consideration is RM47.25m to be satisfied via cash. To note, as at FY17 Top Glove has a cash balance of 240m. The profit guarantee of RM4.5m for FYE18 impli es that this acquisition is valued at 10.5x PE which we deem to be earnings accretive. To note packaging as a percentage of total costs is c.5-6%.

Risks

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

Forecasts

• We impute a lower effective tax rate of 15% for our FY18/FY19/FY20 forecast as the group drawdown on its tax incentives. Subsequently, our FY18-20 EPS expands by 5%.

Rating

HOLD ↔ , TP: RM5.74 ↔

• 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 higher TP of RM5.74 (from RM5.20) as we roll forward our valuation into CY19 based on a P/E multiple of 18.3x (+0.5std deviation above mean).

Source: Hong Leong Investment Bank Research - 16 Oct 2017