Top Glove’s 1QFY19 core PATAMI of RM117.7m (+13.4% YoY) was within ours and consensus expectations. We adjust our FY20 estimates by 5.6% to account for the roll out of the new capacity. We also introduce our FY21 numbers. We roll our valuation into FY20. Our TP increases to RM6.26 and is based on FY20 earnings pegged to a higher PE multiple of 28x (from 25x), a 25% discount to Hartalega’s 1SD above 3 year mean PER (37x). We deem this re-rating justifiable due to (i) the prospects of higher USD moving forward, and (ii) the lower NR prices YoY being a boon for Top Glove due to its more diversified product mix, along with (iii) its pending inclusion into the KLCI, which should provide share price support. We also note that the onslaught of capacity expansion sector wide in 2019 may welcome downward pressure on ASP especially from the nitrile segment.

Within expectations: 1QFY19 core PATAMI came in at RM117.7m (+13.4% YoY), accounting for 23.7% of ours and 22.8% of consensus estimates. We deem the results to be within expectations.

Dividend. No dividends were declared during the quarter under review.

QoQ. Revenue grew +3.7% on the back of marginally higher blended volumes (c. +1%) partially offset by lower volumes from the vinyl glove segment as demand normalized. EBITDA margin improved marginally by 0.2 ppts to 15.6% due to lower nitrile prices (-4% to USD1.26/kg) and NR prices (-11% to RM3.78/kg). Subsequently, core PATAMI improved by 5.7% to RM117.7m (from RM111.4m) on the back of a lower tax expense (-24.5%) QoQ.

YoY. Revenue grew +34.5% to RM1.26bn (from RM938.1m) from higher volumes sold (+19%) on the back of an enlarged capacity. Despite this PBT margin eroded by 1.8 ppts YoY to 11.2% (from 13%) on the back of higher interest cost due to M&A and organic expansion. Despite core PATAMI growing +13.4% YoY, margins declined by 1.3 ppts YoY due to a higher effective tax rate (21.3% vs. 13.1% in 1Q18) due to a deferred tax liability provision of RM5.7m.

Capacity expansion. In FY19 Top Glove will add c.8.8bn pieces in capacity bringing its total installed capacity to an estimated 69.3bn pieces in FY19 with the bulk of the capacity to come in 2H19.

Forecast. We adjust our earnings FY19 earnings by -2.3% to account for higher depreciation and general book keeping in tandem with the recent release of the FY18 annual report. Our FY20 numbers increases by 5.6% to account for the roll out of the new capacity. We also introduce our FY21 estimates.

Maintain HOLD, TP: RM6.26. We take this opportunity to roll our valuation into FY20. Consequently, our TP increases to RM6.26 (from RM4.96). Our TP is based on FY20 earnings pegged to a higher PE multiple of 28x (from 25x), a 25% discount to Hartalega’s 1SD above 3 year mean PE (37x). We deem this re-rating justifiable due to (i) the prospects of higher USD moving forward, and (ii) the lower NR prices YoY being a boon for Top Glove due to its more diversified product mix, along with (iii) its pending inclusion into the KLCI, which should provide share price support. We also note that the onslaught of capacity expansion sector wide in 2019 may welcome downward pressure on ASP especially from the nitrile segment.

Source: Hong Leong Investment Bank Research - 18 Dec 2018