We are raising our TP for Top Glove (TOPG) to RM8.00 from RM6.64, based on a 22x FY19E PER, and reiterating our BUY call. Post our recent meeting with management, we remain optimistic on the company outlook. Earnings growth for the company is likely to outpace its capacity growth, as strong demand for gloves has provided the company with better flexibility in pricing its products to achieve better margins, in our view. The proposed acquisition of Aspion, when completed, could provide further upside to our forecasts.

Recovery in Margin Has Only Just Begun

We believe the worst is over for TOPG, as we expect earnings growth to resume after a relatively weak FY17 net profit (-8.9% yoy). Growth will likely be driven by stronger sales volume and a better EBITDA margin. The recent surge in demand for rubber gloves has provided management flexibility in pricing its products, allowing TOPG to keep most of the cost savings from the lower raw material prices, which it had to pass on to customers previously. We are forecasting the net profit margin to improve to 10.7% in FY18E, from 9.6% in FY17.

Rational Competition Is Good for the Industry

Our recent meetings with glove manufacturers suggest that none of them are speeding up their expansion plans, despite the spike in demand, indicating more rationality in their decision-making and a continuation of their pricing power. TOPG is maintaining its annual 8-10% capacity growth target, but is actively looking at acquisition targets that would either complement its current product mix or internalize its material cost.

Maintaining BUY With a Higher TP at RM8.00

We are lowering our 2018-20 EPS forecasts by 6.8-11.6% on lower sales volume forecasts as we have revised the timing of the new capacity coming on stream. We remain bullish on the company’s long-term outlook and revise higher our TP to RM8.00, based on a 22x FY19E PER (prev. 18x CY18E), which is at +1 stdev of its 5-year historical average. We believe that the premium valuation is justified as TOPG is still at the early stage of its earnings recovery cycle. Top Glove is one of our top BUY picks for the country and sector.

Source: Affin Hwang Research - 12 Dec 2017