Top Glove’s revenue in FY17 breached the RM3bn mark, recording an increase of 18.0% yoy compared to FY16. Nonetheless, overall net profit fell by 7.8% yoy to RM333m, which is in line with our and consensus full year estimates. Lower earnings recorded this year was due to an increase in raw material prices and higher depreciation cost compared to FY16. We reaffirm our BUY call with a higher TP of RM6.64.

FY17: Revenue Up 18% Yoy, Net Profit Down 7.8% Yoy

Despite a 18% increase in FY17 top-line, net profit fell by 7.8% yoy on the back of higher raw material prices and depreciation cost. Over the course of 2017, Top Glove was hit by both higher average natural rubber latex prices (RM5.76/kg up 46.4% yoy) and average nitrile latex price (USD1.1kg up 11.9% yoy). For the 4th quarter alone, Top Glove registered strong growth in terms of revenue (+25% yoy) and net profit (+51% yoy). Stronger earnings performance in 4QFY17 was due to higher sales volume (+13% yoy) and higher ASPs, from the increase in sales of nitrile gloves.

Sequentially Stronger Bottom-line

On a sequential basis, Top Glove’s 4QFY17 revenue and net profit increased by 3.8% and 26.8% respectively. The stronger earnings performance was due to higher orders from all regions and a replenishment exercise by customers after putting orders on hold in 3QFY17, owing to higher raw material prices. We expect earnings to be stronger next year as the Group’s two new manufacturing facilities will commence operations in March 2018, adding another 7.8b gloves per annum to the existing production capacity of 51.9b gloves.

Maintain BUY With Higher TP of RM6.64

We expect earnings in FY2018E to remain strong on the back of (i) higher organic capacity growth; (ii) adoption of technology to increase efficiency and reduce wastage; (iii) margin expansion from the fall in natural-rubber price; and (iv) acquisition of a packaging material manufacturer to speed up the packaging time of its glove products. We reaffirm our BUY call with a higher 12-month target price of RM6.64, based on an unchanged CY18E PER of 18x. Downside risks to our call would be a sharp appreciation of the Ringgit and a higher-than-expected increase in raw-material prices.

Source: Affin Hwang Research - 16 Oct 2017