Top Glove’s (TOPG) 9MFY18 PATAMI of RM332m (+42% yoy) came in within our and consensus expectations, delivering 72% and 73% of our respective forecasts. The strong earnings growth is mainly driven from its existing operations (ex-Aspion), with sales volumes up by 25% yoy as the company benefits from the current robust demand, coupled with a lower effective tax rate of 12%. We maintain our BUY rating with an unchanged 12-month TP of RM12.70. A 7sen interim DPS was announced.

Improving Demand Leads to 25% Gain in Sales Volume

Management has attributed the strong 25% yoy volume growth for 9MFY18 to both market-share gains and improving demand from emerging countries. However, we believe that the disruptions in the vinyl glove supply chain has helped to speed up the switch from vinyl gloves to latexbased gloves for end-users, due to the narrowed price gap and certainty in glove supply. Although the increasing supply of vinyl gloves from China in June 2018 has widened the ASP gap between vinyl and latex gloves, the current price gap still justifies the switch.

Aspion Contribution Below Expectations

The Aspion acquisition was completed in early April, and based on a profit guarantee for FY18E of RM80m, it should be contributing around RM6.6m/month, but the contribution in 3QFY18 was only RM7m. Management has guided that TOPG will need more time to reap the full benefits from the deal; however, the current shortfall will be covered by the vendor. Any impairment on the goodwill would only likely happen after year 3, if any, when the guarantee has expired. In the meantime, TOPG earnings growth is supported by its current capacity growth.

Maintain BUY With An Unchanged TP at RM12.70

We are maintaining our TP at RM12.70 based on an unchanged 27x FY19 PER (+2SD), as we keep our forecasts unchanged, 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. Top Glove remains our top BUY idea for Malaysia.

Source: Affin Hwang Research - 20 Jun 2018