Improving efficiency

Top Glove’s 1QFY17 came in within expectations, as core net profit rose 12% qoq to RM73m. Revenue rose higher than expected, buoyed by stronger sales volume and the weaker Ringgit. Margin also strengthened on the back of improving efficiencies despite higher raw material prices. Maintain BUY.

Solid sales volume growth

1Q revenue rose a solid 9% qoq to RM786m bolstered by strong volume growth of 5% primarily driven by the surge in nitrile gloves as Top Glove continued to make inroads into the US sector with a higher market share. The commissioning of the Lukut Plant helped to boost the nitrile mix to 35%, and this is on track to achieve the targeted 40% of total product mix by 2018. The US$ ASP was largely flat, as most of the upward price revisions had been made towards the tail-end of the quarter. Hence we are likely to see better margins in the next quarter once the higher pricing effect kicks in. Nonetheless, Top Glove continued to benefit from the currency volatility as the Ringgit weakened 4% against the greenback during the quarter, which contributed to the overall higher sales proceeds.

Firmer margin

Top Glove booked a core net profit of RM73m (+12% qoq: -43% yoy) on the back of a firmer margin. Overall results came in within expectations, as we had earlier guided for a RM70-75m range in our results preview note. The better margin was primarily driven by higher operational efficiencies after the completion of internal enhancements at several legacy plants. Existing operational improvement initiatives remain ongoing and when combined with the progressive commissioning of 3 new plants with faster production lines, we estimate that internal efforts could contribute up to 0.1- 0.3ppts to margin enhancement every quarter moving forward. That said, raw material prices continued to inch up along with the renewed optimism in China automotive sales, as the average latex price rose 2% to RM4.46/kg and the average nitrile price rose 2% to US$0.98/kg. We expect Top Glove to continue raising the US$ ASP to pass on the higher input costs given the prevailing easing pricing competition, while downside to the profit margin can also be cushioned by improving efficiency.

Maintain BUY with unchanged TP at RM5.40

We like Top Glove for its changing product mix, dominance in global market share, and ongoing efficiency improvement initiatives. Strong capacity growth visibility and a high production base make Top Glove the prime beneficiary in the event of a US$ ASP recovery. Maintain BUY.

Source: Affin Hwang Research - 16 Dec 2016