Abating Competition

Top Glove is scheduled to release its 3Q FY17 results on 16 June. We expect earnings to rebound sharply yoy albeit off a low base, and an improvement in ASP, driving margin expansion. Despite the absence of capacity expansion, topline should remain fairly solid given higher ASPs. We expect 3Q FY17 earnings to range from RM80-85m. After rolling over our valuation to CY18E, we raise our TP to RM6.50. BUY.

Higher ASP Revision

We expect 3Q FY17 revenue to be firmer yoy on higher ASP revisions, as we see competition abating and industry supply-demand dynamics being more balanced, leading to better pricing management. Volume growth should stay relatively tepid, as there was no significant capacity addition in the quarter. Recent Ringgit appreciation is a potential headwind, but we note the stronger ASP increase should offset the currency impact. For 4Q FY17, we expect progressively higher topline with the consolidation of two small factories it acquired recently and the commissioning of a new factory (annual capacity of 3bn gloves) in June 2017.

Looking for 3Q FY17 Earnings to be in a Range of RM80-85m

We expect 3Q FY17 earnings to range from RM80-85m, which would imply 28-36% yoy earnings growth. Sequential earnings growth momentum may moderate, largely due to the lack of additional capacity and the higher raw material prices. That said, raw-material prices have been trending lower due to the end of the wintering season and moderating China automotive sales in May 2017, which should be positive for progressive earnings growth in 4Q FY17E. We also expect firmer margins ahead on higher automation, as well as an improving product mix and increased efficiency.

Raising Our Target Price to RM6.50; Reaffirming BUY Call

Despite moderating raw-material prices, the YTD average price of RM7.04/kg for natural rubber is still above our previous assumption of RM5-5.50/kg. Hence, we lower our FY17-19E EPS by 2-16% after lifting our raw-material assumptions to RM6-6.50/kg. That said, we maintain our strong earnings outlook for Top Glove (EPS growth of 28% yoy in FY18E) driven by capacity expansion and a higher nitrile contribution. Top Glove remains our top sector pick for its growing nitrile mix, strong volume expansion and relatively compelling valuation. Despite the cuts to our earnings, we raise our 12-month TP to RM6.50 (from RM5.80), based on an unchanged target PER of 18x now applied to our CY18E EPS (from CY17E). Risks to our call would be a sharp appreciation of the Ringgit and a higher-than-expected increase in raw-material prices. Reaffirm BUY.

Source: Affin Hwang Research - 7 Jun 2017