HLBank Research Highlights
Top Glove - Starting Inline
Top Glove’s 1QFY20 revenue of RM1,209.1m (+1.6% QoQ, -4.2% YoY) brought core PATMI to RM107.6m (+32.2% QoQ, +11.6% YoY) after removing forex gain of RM3.8m. The results came in within expectations. 1QFY20 earnings improved (+32.2% QoQ) thanks to stronger sales volume (+6% QoQ) especially driven by nitrile glove segment. Post FY19 annual report model upkeeping, our FY20-21 earnings decreased by 2-4%. We also introduced FY22 estimates. We maintain BUY call with lower TP of RM5.01 (from RM5.02). Our TP is based on FY20 earnings pegged to a PE multiple to 26x.
Within expectations. 1QFY20 revenue of RM1,209.1m (+1.6% QoQ, -4.2% YoY) brought core PATMI to RM107.6m (+32.2% QoQ, +11.6% YoY) after removing forex gain of RM3.8m. The results came within both ours and consensus expectations, at 23% and 25% respectively.
Dividend. No dividends were declared during the quarter under review.
QoQ. Revenue increased (+1.6%) thanks to stronger sales volume (+6%), especially from the nitrile glove segment with 12% increase. Natural rubber glove segment too contributed marginally positively (Latex powder free: +6%, Latex powdered: -6%), as the effect of the upward revision in ASPs took effect as well as downward trend in the price of latex. EBITDA margin improved by 3.6 ppts to 15.4% due to lower NR prices (-11% to RM4.13/kg) and NBR prices (-1.8% to USD1.06/kg). Subsequently, core PATMI improved by 32.2% to RM107.6m (from RM81.4m).
YoY. Revenue declined (-4.2%) to RM1,209.1m (from RM1,262.0m) caused by lower ASPs despite higher sales volume (+0.2%). Nitrile glove segment thrived, with stronger sales volume (+20%), however this was offset by weaker contributions from natural rubber (-14%) and vinyl (-30%) glove segments. Nitrile glove segment improvement was helped by enhanced efficiency from technological advancement, automation and digitalisation initiatives. EBITDA margin declined slightly by 0.2 ppts due to mixed raw materials prices; higher NR prices (+8.7% to RM4.13/kg) and lower NBR prices (-14.5% to USD1.06/kg). Lower effective tax rate of 10.8% (FY19: 16.0%) was due to tax incentives and recognition of deferred tax assets. All in, core PATMI increased (+11.6%) to RM107.6m (from RM96.4m).
Capacity expansion. In 2020 Top Glove will add c.11.8bn pieces in capacity bringing its total installed capacity to an estimated 81.9bn pieces (+16.8% YoY) with 781 lines in 2020 with the bulk of the capacity to come in the second quarter of the year. Furthermore in 2021, Top Glove will be adding c.9.5bn pieces more in capacity (+11.6%).
Outlook. Top Glove will continue to invest line refurbishment and building new technologically advanced glove factories as well as diversifying into rubber or healthcare related business. Top Glove plans are also in progress to establish its Manufacturing and Research Centre of Excellence; new state-of-the-art hub for R&D and product innovation based in Banting.
Forecast. Our FY20-21 earnings decrease by 2-4% due to model upkeeping in tandem with the release of FY19 annual report. We introduce our FY22 estimates.
Maintain BUY, TP: RM5.01. We maintain our BUY call, with a lower TP of RM5.01 (from RM5.02). Our TP is based on FY20 earnings pegged to a PE multiple to 26x. We like Top Glove for its diverse product mix and its prime position to chip away market share. Furthermore with the US-China trade war making China gloves more expensive, this could shift some demand towards Malaysian gloves.
Within expectations. 1QFY20 revenue of RM1,209.1m (+1.6% QoQ, -4.2% YoY) brought core PATMI to RM107.6m (+32.2% QoQ, +11.6% YoY) after removing forex gain of RM3.8m. The results came within both ours and consensus expectations, at 23% and 25% respectively.
Dividend. No dividends were declared during the quarter under review.
QoQ. Revenue increased (+1.6%) thanks to stronger sales volume (+6%), especially from the nitrile glove segment with 12% increase. Natural rubber glove segment too contributed marginally positively (Latex powder free: +6%, Latex powdered: -6%), as the effect of the upward revision in ASPs took effect as well as downward trend in the price of latex. EBITDA margin improved by 3.6 ppts to 15.4% due to lower NR prices (-11% to RM4.13/kg) and NBR prices (-1.8% to USD1.06/kg). Subsequently, core PATMI improved by 32.2% to RM107.6m (from RM81.4m).
YoY. Revenue declined (-4.2%) to RM1,209.1m (from RM1,262.0m) caused by lower ASPs despite higher sales volume (+0.2%). Nitrile glove segment thrived, with stronger sales volume (+20%), however this was offset by weaker contributions from natural rubber (-14%) and vinyl (-30%) glove segments. Nitrile glove segment improvement was helped by enhanced efficiency from technological advancement, automation and digitalisation initiatives. EBITDA margin declined slightly by 0.2 ppts due to mixed raw materials prices; higher NR prices (+8.7% to RM4.13/kg) and lower NBR prices (-14.5% to USD1.06/kg). Lower effective tax rate of 10.8% (FY19: 16.0%) was due to tax incentives and recognition of deferred tax assets. All in, core PATMI increased (+11.6%) to RM107.6m (from RM96.4m).
Capacity expansion. In 2020 Top Glove will add c.11.8bn pieces in capacity bringing its total installed capacity to an estimated 81.9bn pieces (+16.8% YoY) with 781 lines in 2020 with the bulk of the capacity to come in the second quarter of the year. Furthermore in 2021, Top Glove will be adding c.9.5bn pieces more in capacity (+11.6%).
Outlook. Top Glove will continue to invest line refurbishment and building new technologically advanced glove factories as well as diversifying into rubber or healthcare related business. Top Glove plans are also in progress to establish its Manufacturing and Research Centre of Excellence; new state-of-the-art hub for R&D and product innovation based in Banting.
Forecast. Our FY20-21 earnings decrease by 2-4% due to model upkeeping in tandem with the release of FY19 annual report. We introduce our FY22 estimates.
Maintain BUY, TP: RM5.01. We maintain our BUY call, with a lower TP of RM5.01 (from RM5.02). Our TP is based on FY20 earnings pegged to a PE multiple to 26x. We like Top Glove for its diverse product mix and its prime position to chip away market share. Furthermore with the US-China trade war making China gloves more expensive, this could shift some demand towards Malaysian gloves.
Source: Hong Leong Investment Bank Research - 18 Dec 2019
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