Top Glove’s 9MFY18 core PATMI of RM336.6m (+45.8% YoY) was within ours and consensus expectation. Utilization rate is still hovering at c.90%, reflective of robust global demand. We adjust our FY19-20 earnings upwards by 7.5% and 5.0% as we factor in F30 and F31 with a combined capacity of 7.4bn pieces (+13% to existing capacity). However at these levels, Top Glove is trading at 27.1x FY19 PE which is above 2SD. Thus we maintain our HOLD rating, albeit with a higher TP of RM10.81. We expect the share price to be supported by sentiment driven weakness in the Ringgit, which will continue to whet investors’ appetite for export stocks.

Within Expectations: 9M18 core PATMI came in at RM336.6m (+45.8% YoY), accounting for 76.4% of ours and 74.5% of consensus estimates.

Dividend. Declared a first interim dividend of 7 sen/share (9M17: 6 sen/share).

QoQ. Revenue grew +14.8% QoQ on the back of higher volumes (c. +8%) and ASP (+8% QoQ). EBITDA margin expanded by 0.1 ppts to 15.9% on higher utilization rates during the quarter (c.90%) partially offset by higher average raw material prices (NR: - 0.5%, Nitrile: +8.5%) and gas prices (+7%). Consequently, core PATMI grew 20.9% in tandem with top line and favourable effective tax rate of 12% despite higher interest expense (+4.6x) reflective of the groups gearing post Aspion.

YoY. Revenue grew to a record RM1.1bn (+26.6%) on the back higher volumes sold (+37%) on the back of an enlarged capacity and stronger global demand and a higher ASP (+3%). EBITDA margin expanded by 3.5 ppts YoY to 15.9% on the back of higher utilization rates and lower raw material prices (NR:-38.0%, Nitrile -14.2%). Core PATMI grew 58.2% YoY to RM127.4m.

YTD. Revenue grew to RM2.97bn (+19.6%) YoY due to higher sales volumes (+25%), higher utilization rates (c. 90%) and higher ASP (c.+3%). EBITDA margin expanded by 2.2ppts aided by lower raw material prices YoY (NR: -21.0%, Nitrile: -5.0%) partially offset by higher gas prices (+12.0%). Consequently core PATMI grew to RM336.6m (+45.8%) YoY boosted by a lower effective tax rate (9M18: 12% vs. 9M17: 17%).

Volume/ sales mix. Volume growth in 9M18 (+25% YoY) was driven by robust demand across all markets – ex North America (-3%). For 3Q18, powdered latex sales increased by 57% which is reflective of the demand from EM, followed by Nitrile (+32%) and latex powder free (+30%). Robust demand, especially from EM for gloves remains the driving force behind the increase in utilization rates which still hovers at c.90% at 9M18.

Forecast. We adjust our FY19-20 earnings upwards by 7.5% and 5.0% as we factor in F30 (commencing operations in July 2018) and F31 (commencing operations in early 2019) with a combined capacity of 7.4bn pieces (c. +13% to existing capacity) into our model.

Maintain HOLD, TP: RM10.81. Our TP which is based on CY19 earnings pegged to a PE multiple to 25x (2SD above historical mean) increases to RM10.81 (from RM9.95). The prospects of a higher USD moving forward, coupled with capacity expansion (+13%) amidst robust global demand will continue to drive earnings growth. Nonetheless, at these levels Top Glove is trading at 27.1x FY19 PE which is above 2SD. Thus we maintain our HOLD call.

Source: Hong Leong Investment Bank Research - 20 Jun 2018