Result

• Top Glove reported headline net profit of RM83.2mil for its 2QFY17. The quarterly earnings increased 13% q-o-q while declined 20.5% y-o-y. Meanwhile, quarterly revenue of RM851.5mil was higher, +8.4% q-o-q and +22.7% y-o-y.

• For cumulative 6MFY17, the reported net profit of RM156.8mil was 32.7% lower than a year ago despite growing topline, +9.6% y-o-y.

• Headline net earnings were broadly in line. The 6MFY17 net profit of RM156.8mil was broadly in line by accounting for 44% of our full-year estimates and 45% of consensus’ full year estimates.

Comment

• Improved q-o-q. The Group’s revenue in its 2QFY17 increased 8.4% q-o-q, due to higher average selling prices (ASP) against previous quarter despite posted lower sales volume, easing 1% q-o-q. The Group revised upwards its ASP pursuant to the increase in raw material prices. Natural rubber latex prices in 2QFY17 surged to a 5 year high, rising 33% q o-q and 72% y-o-y to an average of RM5.95/kg, while nitrile latex prices also increased to USD1.08/kg, going up by 10% q o-q and 12% y-o-y. Meanwhile, we derive 2QFY17 core net profit at RM81.3mil after stripping out the forex loss and fair value gain on foreign exchange contracts, which increased by 16.8% q-o-q thanks to the higher ASP and strengthening of USD against MYR.

• Better topline but weaker bottomline on y-o-y basis.The Group posted healthier topline, growing 22.7% y-o-y in 2QFY17 despite challenging business environment amid increase in manufacturing costs. Meanwhile, the on-going efforts of the Group in adoption of advanced technology as well as increased automation also partly contributed to the stronger topline growth in 1HFY17 (+9.6% y-o-y). However, the 2QFY17 and 1HFY17 core net profit reduced 21.3% y-o-y and 35.1% y-o-y respectively mainly dragged down by sharp rising in raw material prices during 1HFY17 as witnessed in the drop of net profit margin of 5.3pts y-o-y.
   
• Resilient demand. According to the management, the Group plans to achieve 30% of the world market share from current c.25% as the industry is projected to grow at 6-8% p.a.. Therefore, the Group will continue to pursue M&A opportunities in similar or related industries to achieve its ambition. Meanwhile, for its expansion plan, the Factory 30 (Klang) is expected to commence production by May 2017 which gives additional production capacity of 4.4 billion pieces of gloves. For the Factory 31, it will commence operations by November 2017 despite being delayed for few months as affected by shortage of natural gas.

Earnings Outlook/Revision

• We nudged down our earnings forecast for FY17-18F by 5.5% and 3.5% respectively in view of higher raw material prices.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM5.08. Our valuation for Top Glove is pegged at 18.7x FY17F EPS, which is close to its 3-year mean PE.

• Although we like Top Glove for its high production efficiency, automation and ongoing expansion plan, we are cautious on the competitive business environment as well as external headwinds such as increase in raw material price and rebound of MYR against USD which could negatively impact the Group’s earnings. The Group faces lagging period of 1-2 months on cost pass through mechanism

Source: JF Apex Securities Research - 17 Mar 2017