1HFY19 core PATAMI of RM210.1m (+0.4% YoY) was within our expectations. Maintain BUY and a lower TP of RM5.51, based on FY20 earnings pegged to a PE multiple of 26x, (from 28x) or 0.5SD above the sector mean. A premium is fair given TG’s more diverse product mix, consistent earning delivery and prime position to chip away market share given the sector headwinds.

Within expectations: 1HFY19 core PATAMI came in at RM210.1m (+0.4% YoY), accounting for 46.1% of our estimates which was within our expectations but slightly below consensus estimates at 41.7%.

QoQ. Revenue eased by 8.1% on the back of some ASP pressure due to (i) down trend in raw materials and (ii) competitive pressures. Volumes improved by c.1% QoQ. EBITDA declined 7.2% QoQ to RM182.3m, whilst EBITDA margin improved marginally by 0.1 ppts to 15.7%, despite the headwinds on the back of greater efficiencies within production. Note that nitrile prices eased -14.3% to USD1.08/kg, whilst NR prices eased by 4.2% to RM3.62/kg. Core PATAMI declined by 21.5% partially due to lower associate contributions, as well as higher financing costs (+6.4% QoQ) despite a lower tax expense (15% vs. 21.3% in 1Q19). In computing our Core PATAMI we stripped off RM13.4m of forex gains.

YoY. Revenue grew 21.0% to RM1.16bn (from RM958.4m) from higher volumes sold (+16%) and a higher ASP. EBITDA improvement of 20.6% YoY (to RM182.3m) was in tandem with topline growth. PBT inched up 0.8% YoY to RM125.5m, whilst margin eroded by 0.4 ppts YoY to 10.8% (from 11.2%) on the back of higher interest cost (c.6x) due to M&A and organic expansion. Subsequently, core PATAMI declined 12.3% YoY to RM92.4m after adjusting for FX gains amounting to RM13.4m vs RM3.6m in 2Q18). A higher effective tax rate (15.0% vs. 11.7% in 2Q18) due to a reduction in tax allowance following the expiry of the 3 year special reinvestment allowance in 2018 also perpetuated the decline.

YTD. Revenue increased to RM2.42bn (+27.7%) attributed namely to higher volumes (+18% YoY). EBITDA grew to RM378.6m (+30.2%), whilst scratching up a slight margin improvement of 0.3ppts to 15.6% on the back of greater operational efficiencies. Core PATAMI of RM210.1m (+0.4%) exhibited lacklustre growth due the same above mentioned factors (tax and higher finance costs).

Capacity expansion. TG has pushed forward the capacity expansion for F32 1st

phase and F33 from 1Q19 to 2Q19 (combined capacity of 3.4bn pieces). This implies that in FY19 TG will only increase capacity to a maximum of 4.6bn pieces or 7.6% YoY, which is well within the range of the annual demand growth.

Value emerging. Given the YTD sell down (-25%), risk reward looks attractive as TG is trading at its 3 year mean (see Figure #2). TG has consistently delivered double digit earnings growth (3 year EPS CAGR c. +13.0%). Its position as the biggest glove manufacturer by installed capacity blesses them with the leverage to chip away market share from the other players on the back of the sectoral headwinds.

Forecast. Unchanged as the Results Were Inline.

Maintain BUY, TP: RM5.51. Maintain BUY but with slightly lower TP of RM5.51. Our TP is based on FY20 earnings pegged to a PE multiple of 26x (from 28x) or 0.5SD above the sector mean (see Figure #3). A premium is warranted given TG’s more diverse product mix, consistent earning delivery and prime position to chip away market share given the sector headwinds.

Source: Hong Leong Investment Bank Research - 25 March 2019