Highlights

• Top Glove held their 2Q18 analyst results briefing. The following are some key takeaways.

• To recap, YTD revenue grew to RM1896.6m (+15.9%) yoy due to higher sales volumes (+19%), higher utilization rates (c. 87.5%) and higher ASP (c. +3%). Consequently PATAMI grew to RM214.5m (+37.1%) yoy partially boosted by a lower effective tax rate (1H18: 12% vs. 1H17: 19%).

• The greater global demand for gloves remains the driving force behind the increase in utilization rates and thus stronger top line growth. 2Q18 utilization rates are hovering c.90% vs. 80% in FY17. We continue to expect utilization rates to maintain at these levels for FY18.

• YTD EBITDA margin expanded by 1.4ppts aided by lower aggregate raw material prices yoy, partially offset by higher gas prices (+6%). Natural rubber prices declined by (-10%) whilst nitrile prices increased marginally (c.+1%). Since nitrile is priced in USD the increase has been partly cushioned by the stronger MYR yoy. We understand that current ASP (+3% yoy) is not fully reflective of the recent rise in nitrile prices (+5% qoq).

• TG has started to redirect its raw materials suppliers to Aspion. Synergy gains from this marriage are still at infancy. Finessis is being launched in the US this month with its Corium line being introduced. The Finessis range is also being co-branded with McKesson. A clear deviation from TG’s current pure OEM play. Finessis Aegis is still to achieve USFDA approval. The time frame will be elongated as it is a different product category.

• On the recent water disruption in Selangor, the group highlighted that they have sufficient water at their very own water treatment facility to weather the recent water issues affecting Selangor.

• On the condom business, TG currently has an installed capacity of c.800m per annum. TG aims to leverage selling to existing clientele who also procure condoms. Management highlighted that they will most probably not enter the tender segment as certifications requirements are higher and therefore will look to focus on OEM market. There is potential M&A within the space to boost the condom business.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD ↔ , TP: RM9.95 ↔

• 1 in 3 surgical gloves globally will come from TG upon completion of the acquisition of Aspion which marks the group’s intent to dominate a high margin niche segment, which is expected to propel TG’s earnings. Nonetheless, at these levels we believe that the share price fully reflects this evolution. Maintain HOLD .

Valuation

• Maintain TP of RM9.95 . Our TP is based on a PE multiple to 25x or 2SD above historical mean pegged to CY19 earnings. (see Figure#1).

Source: Hong Leong Investment Bank Research - 19 Mar 2018