Top Glove (TOPG) reported 1QFY19 net profit of RM110m (+8.3% yoy; 4.4% qoq) which came in broadly within ours and consensus estimates, accounting for 20% and 21% of the respective forecasts. Though Aspion turned out to be a negative surprise to us this quarter, rising contribution of the new capacity and the interest cost-savings from the convertibles should help TOPG deliver stronger earnings in the next three quarters to meet our full year forecasts. As TOPG’s upside potential narrows (+5%), we downgrade our call to HOLD, though maintaining our TP at RM 6.00.

Demand Growth Continues, Margin Lower Due to Product Mix

Utilisation rate for group remain healthy at around 90%, as sales volume grew by 19% yoy and 0.6% qoq. Sales volume growth is expected to increase as we move forward, as Plant F31 is expected to be completed by early 2019. We are maintaining our 10% capacity growth for FY19 unchanged, as there is no significant delay to the expansion schedule. The weaker margin is during the quarter was also contributed by changes to the product mix, as there was higher demand for the lower margin nitrile glove during the quarter. We expect the trend to normalise across the quarter.

Profitability Could be Stronger in 1QFY19 If Not for Aspion

The biggest negative surprise in 1QFY19 was recently-acquired Aspion, which saw an operational loss of around RM3m for the quarter, as Aspion was still profitable in 4QFY18. Although management has yet to share the cause for the losses, they are guiding for Aspion to turn profitable again by end-FY19. The issuance of the convertible bonds is also expected to be completed by Jan’19, of which will lower the current high interest cost related to the debt issued for the acquisition of Aspion.

Downgrade to HOLD With Unchanged TP of RM6.00

We downgrade TOPG to HOLD from BUY, as the stock is now fairly valued (upside potential +5%) close to our TP of RM 6.00 (unchanged), based on a 27x CY19E PE target (+2SD). We believe that earnings are likely to pick up in coming quarters, due to contribution from new capacity and interest cost-savings. In the sector, Kossan (KRI MK, RM4.34, BUY) and Supermax (SUCB MK, RM3.54, BUY) are our preferred picks. Downside/upside risks: sharp appreciation/weakening of the Ringgit and a higher-than-expected increase/decrease in raw-material prices.

Source: Affin Hwang Research - 18 Dec 2018