Better Profitability Helps to Drive Recovery

Top Glove (TOPG) reported a decent set of numbers: 1QFY20 corePATAMI of RM111.4m (+39.2% qoq; +1.2% yoy) is slightly ahead of our but within consensus estimates, delivering 26% and 22% of the respective forecasts. The improvement in earnings can be attributed to the higher sales volume and the recovery in margin, as competition in the latex segment has eased. We are expecting stronger quarters ahead, with new capacity expected to start contributing in 2HFY20. Reiterate BUY and raise our TP to RM5.40.

Easing Competition Is Good for Top Glove

We believe that the recovery in margin was due to the price increases on the natural latex gloves that were initiated by TOPG in 4QFY19. Although sales volume for the latex gloves is still down by 14% yoy, we believe that the overall competition has eased, as the sales volume has remained stagnant qoq. Nevertheless, latex powder-free gloves are up by 1% yoy or 6% qoq, which we believe is a positive indicator that competition has eased somewhat, at least among the Malaysia players. Sales volume for the latex powdered gloves continued to decline by 6% qoq.

Nitrile Segment Going Strong

We are expecting stronger quarters ahead, mainly driven by the stronger demand for TOPG’s nitrile gloves, as sales volume is up by 20% yoy (or 12% qoq). Due to the surge in sales volume, utilisation rates for TOPG’s nitrile lines are at 97%. TOPG was able to meet the increasing demand, as the new Factory 32 (2.2bn + 1.2bn) has started contributing. Despite facing labour shortage issues, TOPG was able resolve the situation by recruiting workers from Nepal, Indonesia and Myanmar. As such, we are not expecting any delays to its current expansion plan.

Reiterate BUY With a Higher TP of RM5.40

We have tweaked our EPS for FY20E by 3.7% due to the lower effective rate guidance and therefore raise our 12-month TP to RM5.40 based on an unchanged 31x PER (+1SD) on our FY20 estimate. Top Glove remains one of our Top BUY picks for the country and sector.

Source: Affin Hwang Research - 18 Dec 2019