Result

• Top Glove Corporation Berhad (Top Glove) reported a net profit of RM105.4m for its 1QFY18. The quarterly net earnings improved by 6.9% QoQ while surged by 43.8% YoY. Meanwhile, revenue stood at RM938.1m, up 4.0% QoQ and 19.4% YoY.

• A strong start of the year with result meeting expectations. The result was within our expectation (26.6% of our full year earnings estimate) and consensus (26.8% of market earnings).

Comment

• Better earnings QoQ. The Group recorded higher earnings for 1QFY18 against 4QFY17 by 6.9%. The better earnings were due to increase in sales volume of 8% along with improvement in product efficiency and quality with operating margin increased by 1.9ppts, coupled with capacity coming onstream and strong demand growth.

• Stronger earnings YoY driven by higher topline….. As compared to 1QFY17, the revenue was higher in 1QFY18, representing an increase of 19.4%. The stellar performance was mainly due increase in sales volume of 17% due to strong demand growth in developed and emerging markets. Besides, China’s district enforcement against polluting industries which benefited both natural and nitrile gloves.

• ……..and improved margins. Besides, the Group reported a higher operating profit margin, +1.4ppts, mainly contributed by continuous improvement initiatives in terms of automation, better production and cost saving.

• Continuous expansion to accommodate rising demand. The Group will continue to build 1 to 2 factories. Its current plans for expansion include construction of 2 new manufacturing facilities, i.e. Factory 31 in May 2018, and Factory 32 in December 2018.
• Improving productivity. Upon completion of Factory 31 and Factory 32, it is expected boost the Group’s total production line by additional 78 lines and a production capacity of 7.8 billion gloves per annum.
• Update on new business venture. The Group’s condom manufacturing facilities are expected to commerce operation in June 2018. Top Glove targets to produce 1 billion pieces of condom within 2 years.

• Product expansion. The Group will emerge as the world’s largest manufacturer of surgical gloves upon completion of acquisition of Aspion Sdn Bhd wit targeted PAT of at least RM80m/year. Thus, we anticipate Top Glove’s net profit for FY19F to increase by 11% on the assumptions of 70:30 debt to equity ratio and interest costs of 2.5% on its USD borrowings for the acquisition.
• Positive outlook. We believe that the Group could achieve better sales volume for the coming year thanks to China’s district enforcement against polluting industries and upon completion of acquisition of Aspion Sdn Bhd.
• Risks include: 1) increasing minimum wages. With the rising automation, we believe the negative impact would be minimal to the Group, 2) rising cost especially on latex, 3) strengthening of MYR against USD, and 4) further hike in natural gas tariff. However, we opine that the Group is able to pass on the higher costs of production and factor of unfavourable forex to the customers accordingly in view of current demand outstrips supply.

Earnings Outlook/Revision

• We retain our earnings forecast for FY18F and FY19F pending finalization of the deal to acquire Aspion Sdn Bhd.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM8.20 (previous target price of RM7.60) after we roll over our valuation to FY19F and ascribe higher PE ratio of 23.4x (from 21.7x) which is at its upcycle valuation to better reflect the full earnings impact of the acquisition of Aspion Sdn Bhd and track its PE discount to its peer, Hartalega in which its share price has been on uptrend recently.

• Overall, we favour Top Glove for its: 1) strong earnings growth trajectory backed by brighter demand outlook, 2) margin enhancement with the surgical gloves come on stream and anticipated higher economies of scale after the acquisition, and 3) further expansion of its existing product range by adopting technology and innovations of Aspion Sdn Bhd to penetrate untapped markets.

Source: JF Apex Securities Research - 20 Dec 2017