Top Glove (TOPG) reported a good set of results - PATAMI for FY18 grew 32% yoy, driven by sales volume growth of 26% and improving efficiency (margin). Although TOPG recorded a negative qoq earnings growth in 4Q, due to a higher effective tax rate, the numbers are still within both our and consensus expectations, delivering 96% and 98% of our respective forecasts. A 10sen final DPS was also announced. Maintain BUY rating with an unchanged TP of RM12.00.

Demand Growth Continues, Utilisation Rate Remains High

TOPG was able to continue to deliver strong qoq volume growth of 6% in 4QFY18, as its new plant F31 (~3bn pcs/year) commenced operations, and is expected to achieve full capacity by early 2019. We are forecasting an 8- 10% capacity growth for FY19, which is lower than the 15-17% increase in capacity in FY18. TOPG’s current capacity is c. 60.5bn pcs/year. Despite the inclusion of the new capacity, utilisation rates remain at elevated levels of around 90%, a good indicator that demand remains robust.

Higher Effective Tax and Interest Cost

Although EBIT was up by 76% yoy for FY18, PATAMI was only up by 32% yoy. The strong performance didn’t flow through to the bottom line due to the higher finance expenses and effective tax rate. The higher finance cost is attributed to the USD debt that TOPG raised to acquire Aspion. Despite the ongoing lawsuit against the vendor of Aspion, no impairment was allocated during the quarter. However, the higher effective tax rate was a negative surprise to us, as we had previously assumed that TOPG would be able to continue enjoy a lower tax rate from various tax incentives. The effective tax rate was 14.3% in FY17 and 16.3% in FY18.

Maintain BUY Call With Unchanged TP of RM12.00

We are maintaining our BUY call, as we keep our TP unchanged at RM12.00 based on an unchanged 27x FY19E PER (+2SD), and maintain our EPS forecasts for FY19-20E. The high utilisation rate provides a positive read-through for its peers, demonstrating that demand for rubber gloves remains robust. However, Kossan (KRI MK, RM4.20) and Supermax (SUCB MK, RM2.87) remain our preferred picks for the sector, and top BUY ideas for Malaysia.

Source: Affin Hwang Research - 12 Oct 2018