Highlights

• We attended Top glove’s FY17 analyst briefing and walked away feeling neutral. The following are the key takeaways.
• To recap, revenue grew 18% yoy due to higher volume (+7%) on increased capacity, higher ASP and a stronger USD throughout FY17. However, EBITDA declined 8.8% yoy due to higher raw material cost.
• Raw material prices increased significantly throughout FY17 as the average NR Latex and Nitrile Latex prices crept up 46.4% and 11.9% higher than in FY16, affecting EBITDA margins (-3.9% yoy). Raw material prices have since normalized recently.
• Management shed more colour on the tax incentives which consists of (i) reinvestment allowance set to expire in 2018, (ii) c.RM90m in tax incentives from previously unutilized tax incentives (iii) and R&D incentives which are available for another 4 years. Based on this guidance, effective tax rate should hover at c.15% for the foreseeable future.
• Top glove’s vinyl segment is a beneficiary of the Chinese government’s environmental reforms (force shutting coal powered plants due to pollution). The subsequent supply disruption in China has augured well for Top glove. This is evident in the 8% increase for vinyl gloves in 4Q17. Management expects this temporary disruption to remedy as manufacturers switch to gas powered plants. As at 4Q17, vinyl accounts for 7% of its product mix.
• Capex for FY18 for organic growth has been budgeted for c. RM250-300m; however we expect this to increase in tandem with the groups M&A activities.
• The group’s expansion plans for CY18 remain on track despite F31 being pushed to March from January due to a slight delay in construction works. F32 remains on schedule (December 2018). With an added capacity of 7.8bn pieces in CY18, this will bring Top glove ’s total capacity to 59.7bn pieces per annum (+15% yoy).
• Condom business remains on track, management guided that 2 lines will be started with an initial target to achieve 20 lines and 1bn pieces in capacity within 2 years.
• The rationale of the proposed acquisition of Eastern Press Sdn Bhd, a major supplier of packaging material to the group are to (i) improve supply chain coordination, and (ii) reduce costs and lead time in the supply of packaging materials. Management anticipates that this acquisition could reduce costs by c.RM4.5m per annum.

Risks

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

Forecasts

• Unchanged

Rating

• 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. However valuations are a bit stretched and as such we maintain our HOLD rating.

Valuation

• Maintain our TP of RM5.74 based on P/E multiple of 18.3x (+0.5std deviation above mean) on CY19 earnings.

Source: Hong Leong Investment Bank Research - 19 Oct 2017