What’s New

• We have attended Top Glove Corp’s 1QFY17 results briefing and came back feeling neutral on the Group’s prospects in the near-term.

• Meanwhile, we maintain our HOLD call on the stock due to intense competition among rubber glove players and the volatility of foreign exchange rate.

Key Take Away

• 1QFY17 earnings improved on quarterly basis. To recap, Top Glove’s 1QFY17 core net profit (excluding forex gains and fair value loss) of RM69.6mil advanced by 20% q o-q, aided by higher sales volume and ongoing efficiency improvement initiatives with focusing on automation.

• The Group’s core net profit declined by 46.1% y-o-y mainly dragged down by rising cost of raw material, gas price and minimum wages. Meanwhile, the Group’s 1QFY17 revenue declined marginally by 1.8% y-o-y mainly due to price competition. The average latex price continued its upward trend, increasing by 12.6% to RM4.46/kg respectively while the average price for nitrile decreased slightly by 4.9% to USD0.98/kg compared with 1QFY16.
   
• Minimal impact from new ruling on foreign worker levy. The government has imposed the ruling on employers to bear the annual levies for their foreign workers which we foresee having minimal negative impact to the Group. The management said that the ruling was a ‘surprise’ and it was made without proper dialogue with the industry players. Nevertheless, the management highlighted that it has invested heavily in automation and re-engineering over the past 3 years which enabled the Group to save its labour force of about 1,000 foreign workers. The Group will continue to invest in R&D and automation to cater for the rising in operating costs.
   
• Lower natural gas tariff would mitigate the higher production costs. The natural gas tariff is lowered by 2.74 per cent, or RM0.40 per mmBtu, for six months from Jan to June 2017. This would mitigate the negative impact of rising raw material prices in the near term. Overall, we believe the Group could maintain a favourable product selling price with ASP hike and still stay competitive in the industry.

Earnings outlook/Revision

• We keep our earnings forecast for FY17-FY18F unchanged after taking into account the new ruling on foreign worker levy and lower expenses due to reduction in natural gas tariff

Valuation & Recommendation

• Maintain HOLD with higher target price of RM5.08 (previous target price: RM4.88) in view of favourable foreign exchange rate i.e, the strengthening of USD against MYR. Our valuation for Top Glove is pegged at 17.5x FY17F EPS, which is close to its 3-year mean PE. We reckon that the market has factored in the positives and hence we foresee limited upside to the share price with unfavourable risk reward.

Source: JF Apex Securities Research - 6 Jan 2017