Result

• Top Glove Corporation Berhad (Top Glove) reported a net profit of RM101.6m for its 4QFY18. The quarterly net earnings dropped by 13.6% QoQ while surged 7.5% YoY. Meanwhile, revenue stood at RM1216.9m, up 10.6% QoQ and 34.8% YoY.

• For 12MFY18, the Group achieved a topline of RM4214.0m, which was 23.6% higher than a year ago with a stronger bottomline of RM433.6m, 32.0% higher.

• Within our and market expectation. 12MFY18 net profit was within our and consensus expectation by accounting for 101.8%/97.7% of our/consensus full year earnings forecast respectively.

Comment

• Weaker earnings QoQ impacted by higher tax expenses which offset better revenue. The Group recorded a higher revenue, thanks to higher sales volume along with higher selling price. However, the higher revenue was offset by higher tax expenses, mainly due to underprovision in the previous year, which resulted in higher tax expenses in 4QFY18.

• Stronger earnings YoY, thanks to highest ever sales revenue achieved within a single quarter. The higher sales revenue was mainly contributed by higher sales volume, up 27% YoY. However, a lower PAT margin of -2.1ppts was recorded, no thanks to higher tax incentive in 4QFY17 as compared 4QFY18.

• Excellent result for 12MFY18 driven by stronger topline and bottomline. The higher revenue was mainly due to higher sale volume of 26%. Besides, the Group recorded better EBIT (+42.5%) and EBIT margin (+1.8ppts), crediting to strong demand growth coupled with application of advanced technology which improved operational efficiency and lower manpower requirement resulted in higher utilisation rate.

• Proposed bonus issue. Earlier, The Group announced a bonus issue of 1 new share on the basis of every existing share held. This is to improve the stock liquidity and rewards its existing shareholders.

• Dividend declared. The Group declared a final dividend of 10sen/share (before bonus issue) for this quarter, bringing its FY18 dividend of total 17sen/share, an increase of 2.5sen as compared to FY17.

• Material Litigation against Adventa Capital. The Group is claiming a sum of not less than RM640.5m with regards to alleged fraudulent misrepresentations on the acquisition of Aspion. Based on the legal advice received, the Directors of the Group are of the view that there is a high chance of succeeding in this claim.
• Projection of Aspion’s existing business in the next 5 years. The management guided that: a) allocation of additional resources (eg. Engineering team, HR team and etc) to work with Aspion, b) further enhancement, modification and improvement of glove production process, c) leverage the Top Glove name to achieve better synergies and d) tap into Top Glove’s marketing and distribution to increase its sales.
• Continuous expansion to improved productivity. The Group is in the process of expanding its existing facilities of F32 (Phases 1 & 2 to be completed in early and end of 2019), F33 (to be completed in early 2019), and F5A (to be completed in end 2019), Meanwhile, a new factory, F8A in Thailand would be operational by early 2020 as guided by the management. All in, these will boost the Group’s total no. of production lines by an additional 98 lines. Hence, the Group will have a total capacity of producing 69.1b gloves per year.

• Overseas expansion to Vietnam. The Group has entered into an agreement to acquire a piece of land for a factory in Vietnam and plan to commence operations within the next 2 years.

• Continuing to explore inorganic expansion. The Group will continue its expansion through mergers and acquisition in order to grow faster and be more efficient.

• Moving forward, we believe that the Group is able to achieve high revenue and profit margins attributable to continuous advancement in technology, strengthening of USD against MYR, and higher sales volume (increase in productivity) by the end of FY19 due to continuous expansion. Besides, we believe that a greater synergy would be realised as the Group leverages on Aspion’s technology and surgical expertise.

• Risks include: 1) Strengthening of MYR against USD, 2) Possible loss from the legal proceeding against Adventa, 3) potential hike in raw material prices, and 4) potential overcapacity in the industry.

Earnings Outlook/Revision

• We maintain our earnings forecast FY19F and FY20F pending finalisation for the possible outcome of the litigation.

Valuation & Recommendation

• Maintain HOLD with a higher target price of RM9.74 (previous target price of RM9.00) after rollover our valuation to FY20F. Our revised target price is now pegged at 27.2x FY20F EPS. We maintain our neutral stance on the stock as the share price would be clouded by the possible write-off pending outcome of the litigation.

Source: JF Apex Securities Research - 12 Oct 2018