Top Glove (TOPG) reported another weak set of results, as it FY19 core-PATAMI of RM371m (-14.5%) fell short of both consensus and our estimates, accounting for only 91% of both estimates. Despite improvement in the nitrile glove segment, this was not enough to compensate for the weakness at both the natural latex and vinyl glove segments. We are lowering our EPS for FY20-21E by 8.6-12.9% to factor in our lower margin assumptions. As such, we are cutting our TP to RM4.10 and downgrading our call to SELL from HOLD.

Increased Competition in the Latex and Vinyl Glove Segments

TOPG has started to increase the average selling price (ASP) of natural latex gloves by 4-12% qoq in the 4Q FY19, to pass on the higher raw material cost. Despite the improvement in margin, overall profit was still down qoq, due to the decline in sales volume by 12-23% qoq. However, we believe that as other manufacturers start to raise ASPs, we expect TOPG’s volume to recover too. The easing in the latex price in recent months can help to ease pricing pressure. The losses for the vinyl glove segment have also widened during the quarter, due to stiffer competition in China, as the China government eases its environmental controls.

Continues to Take Market Share in the Nitrile Segment

The nitrile segment continues to be the bright spot for Top Glove, as sales volume grew by 30% yoy for FY19, despite the higher competition in the segment. The rise in sales volume was supported by the rise in capacity by 6% qoq. TOPG also increased ASPs by 1% during the quarter to pass on the higher nitrile costs. The price increase has not impacted sales, as volume grew by 12% qoq for 4Q FY19, which leads us to believe TOPG is winning market share from other manufacturers. Top Glove is aiming to boost its capacity to 84.1bn pieces in 2020 (from current 63.9bn pieces).

Downgrading to SELL as We Revise Down Our EPS

We are cutting our EPS for FY20-21E by 9-13% on our lower profit-margin assumptions in the natural glove segment. After our earnings cuts, we are lowering our 12-month TP to RM4.10 (from RM4.70), based on an unchanged target PER of 24x on our CY20E EPS. With 13% downside potential to our new TP, we downgrade our rating to SELL from HOLD. Upside risk: better-than-expected performance at its China operations.

Source: Affin Hwang Research - 27 Sept 2019