Top Glove (TOPG) reported a weak set of numbers: 9MFY19 core PATAMI of RM290.5m (-12.5% yoy) fell short of both our and consensus estimates, accounting for only 62% and 63% of our respective forecasts. The weakness was due to lower margins from its natural rubber glove segment, which was negatively impacted by the sharp rise in latex prices. We cut our FY19-21E EPS by 2.8-12.8% to factor in the recent performance and reduce our TP to RM4.70. Downgrade to HOLD from Buy.

Margin Impacted by Higher Latex Prices

Although overall sales volume continued to record positive growth (3Q19: +9% yoy; 9MFY19: +15% yoy), core PATAMI for 9MFY19 contracted by 12.5% yoy. The weak performance was due to a significant increase in raw-material costs as latex prices increased by 29% in 3QFY19, which negatively impacted margins. However, management guided that they correspondingly raised prices by 17% to pass on the higher cost. As such, we are assuming that margins will recover in the subsequent quarters. We are also assuming that latex prices will remain stable after the winter season.

Nitrile Gloves Still Growing Strong Despite Competition

Despite the increased competition in the nitrile segment, ASPs for nitrile gloves remained relatively stable during the quarter, as prices only declined by less than 1%. Margins for nitrile gloves also expanded during the quarter, as nitrile (raw material) prices have fallen by 4.6%. Should nitrile raw-material prices not fluctuate too much, we believe that current margins should be sustainable. TOPG also delayed some of its expansion plans, but overall its plans are still within our expectations. Most manufacturers start the year with aggressive expansion targets but tend to revise them lower in subsequent months.

Downgrade to HOLD as Valuations Look Fair Post Revisions

We are cutting our EPS for FY19-21E by 2.8-12.8% to factor in the weaker 3QFY19 and as we revisit our margin assumptions for the natural glove segment. We are also lowering our 12-month TP to RM 4.70 from RM4.90 on the back of our recent earnings cut; however, we are keeping our valuation method unchanged which is based on 24x (+1SD) CY20E PER.

Source: Affin Hwang Research - 19 Jun 2019