Continues to Surprise

Top Glove (TOPG) reported a relative good set of numbers for 1HFY18 with PATAMI of RM214.5m (+37.2% yoy) coming in above our and consensus expectations, despite only delivering 48% and 50% of our respective forecasts as earnings from Aspion will only be consolidated from 2HFY18. The better-than-expected performance was driven by a higher utilisation rate of around 90%, coupled with a lower effective tax rate of 12%. We maintain our BUY rating with a higher 12-month TP of RM12.70.

Strong Demand Continues to Push Utilisation Rate Higher

Due to the lack of new capacity growth during the quarter, TOPG was only able to grow its sales volume by 3% qoq by increasing its utilisation rate to around 90% in 2QFY18 from 85% in 1QFY18. As TOPG is already operating at its peak utilisation rate, volume growth for 3QFY18 is likely to remain flat, as the new capacity is only expected to start contributing in 4QFY18. Nevertheless, we expect overall earnings growth from additional contribution from Aspion in 3QFY18, as the acquisition is expected to be completed soon.

Lower Effective Tax Rate Helps Push Profits Higher

Apart from the strong demand that helped sustain margins and volume growth, TOPG managed to utilise some of its tax incentives to further boost its earnings. The effective tax rate at 12.4% in 1HFY18 was also significantly lower than the 18.5% in 1HFY17. Management has guided that the effective tax rate is sustainable at around 12%-14%, which is lower than our previous assumption of around 16%. As such, we have tweaked our forecasts to factor in the lower tax rates.

Maintain BUY With a Higher TP at RM12.70

We raised our TP to RM12.70 from RM12.20 based on an unchanged 27x FY19PER (+2SD), on the back of the 3.7-4.2% revisions of our EPS forecasts for FY18-20, while maintaining our BUY call. We believe that TOPG’s high utilisation rate provides a positive read through for its peers, demonstrating that demand for rubber gloves remains robust. It also supports our bullish view on Supermax (SUCB MK, BUY, RM2.83) as it is currently operating at only 70%. Both Supermax and Top Glove are among our top BUY ideas for Malaysia.

Source: Affin Hwang Research - 16 Mar 2018