We are maintaining our positive view on Top Glove post our recent meeting with management, as we believe that investors will look past the weak performance of Aspion, given that the profit shortfall will be compensated by the vendor. The catalyst for the stock will likely be the performance of its existing operation, which is benefiting from the current robust demand arising from developing countries, in our view. Reiterate BUY with a revised higher 12-month TP of RM13.00.

Needs More Time for Aspion to Achieve Target

The profit guarantee from recently acquired Aspion is a net profit of RM80.9m and RM108.3m for FY18E and FY19E (October year-end) respectively. Given that the profit from Aspion was merely RM7m in the recent quarter, management has guided that they will need at least another year or so before they are able to achieve those target results. Based on our understanding, the profit guarantee is derived mainly based on a higher sales volume (utilisation rate) without factoring in any cost synergies across both entities, and earnings growth could still surprise us on the upside. Nevertheless, the earnings shortfall for the next 2 years will be refunded by the vendor.

Strong Demand Helps Mitigate Cost Pressure

Despite the rising production costs (higher gas cost, foreign worker levy and stronger RM), management guided that they are able to pass on the bulk of the incremental cost through higher ASP. We believe margins should improve, as the full impact of the price revision in May would be reflected in the subsequent quarters. Although the gas price is expected to increase in July, the recent weakening of the RM and raw-material prices has helped ease the cost pressure. A 1-2% price hike could be on the cards, as the current robust demand should facilitate such a hike, which is beneficial for Top Glove and other glove players, in our view.

Maintain BUY With a Higher TP at RM13.00

We are revising up our TP to RM13.00 (from RM12.70), based on an unchanged 27x CY19 PER (+2SD), on the back of +0.7%-1.9% upgrades to our EPS forecasts for FY18-20E due to our revised margin assumptions, while reiterating our BUY call. Downside risks to our call are: 1) strong fluctuation in USD/RM; and 2) higher-than-expected increase in rawmaterial costs.

Source: Affin Hwang Research - 29 Jun 2018