Result

• Top Glove Corp. reported a net profit of RM98.6mill for its 4QFY17. The quarterly net earnings improved by 26.9% q o-q while surged by 57.9% y-o-y. Meanwhile, the Group recorded a quarterly revenue of RM902.4mil, which increased by 3.8% q-o-q and 25% y-o-y.

• For 12MFY17, the Group achieved a bottom line of RM332.7mil, which was 7.9% lower than a year ago despite stronger topline, 18% higher y-o-y.

• Meeting market expectation but below ours. The 12MFY17 net profit of RM332.7mil was below our expectation by meeting 92% of our full year earnings estimate on the back of lower-than-expected margins in relation to higher raw material prices and weakening of USD against MYR.

Comment

• Higher earnings q-o-q. As compared to 3QFY17, operating profit was marginally higher in 4QFY17, representing an improvement of 8.9%. The improved performance was attributed to the improvements is manufacturing process, which enabled the Group to manage its costs more efficiently, reducing wastage and improving glove quality.

• Stronger earnings y-o-y. The Group recorded high earnings for 4QFY17 against 4QFY16 by 49.1%. The better earnings were due to the higher sales volume achieved by the Group mainly because of higher demand and capacity from the factory 30 in Klang. In addition, the lower raw material prices also lifted the operating profits.

• Higher sales volume along with higher ASP. The Group’s sales revenue achieved another record-high of RM3.4 billion for FY17, +18% over FY16 thanks to increase of 7% sales volume in FY17 from its new capacity. The increased sales volume is mainly resulted from the demand growth coupled with new capacity came onstream from factory 30 in Klang. Moreover, the higher ASP resulted from a surge in raw material prices, along with the increase in sales of nitrile gloves, which command high ASP.

• Lower FY17 earnings dragged by soaring raw material prices. Although the Group recorded an increase of 18% from its topline compared with FY16, the bottom line fell 12.6%. The Group is consistently focusing on the improvements in the manufacturing process to mitigate the impacts from the price increase of raw materials, mainly natural rubber latex price, +46.4% higher than FY16 while the nitrile latex price, up 11.9% compared with FY16 resulted in lower operating profit. In addition, the strengthening of MYR against US dollar caused a lower PBT in FY17.

• Dividend declared. The Group has declared a final single tier dividend of 8.5 sen/share. Total dividend and proposed by the company for the FY17 is 14.5 sen per ordinary shares.

• Production boost to meet rising demand. We are positive on the outlook as we believe the Group could deliver better earnings in FY18 due to expansion plans of 2 new manufacturing factories by March and December of 2018 which will boost the production lines by an additional 78 lines and production capacity by 7.8 billion pieces of gloves. Moreover, the Group will start its commencement of condom manufacturing facility in 2018 in order to expand other revenue source.

• Improving productivity. Also, the Group is in the midst of leveraging emerging technologies such as Industry 4.0 and the implementation of “smart factories” in order to improve its production lines and automations. In addition, the Group continues to explore more inorganic growth opportunities through mergers and acquisitions.

• Brighter outlook. We believe that the Group could achieve better sales volume for 1QFY18 thanks to the effect of Hurricane Urma. Moreover, the earnings would remain elevated stemming from the sustainable lower costs of natural rubber latex and nitrile latex given a steady increase in demand as well as capacity.

Earnings Outlook/Revision

• We increase our net earnings forecast for FY18 by 9% to RM396.1mill as we account for the higher production from the new capacity and higher margins as we envisage lower costs of raw materials.

Valuation & Recommendation

• Upgraded to BUY from HOLD with a higher target price of RM6.85 (previous target price of RM5.50) after our earnings upgrade. Our revised target price is now pegged at 21.7x FY18F PE (+1 SD above mean) based on EPS 31.6 sen.

Source: JF Apex Securities Research - 16 Oct 2017