Result

• Top Glove Corporation Berhad (Top Glove) reported a net profit of RM110.1m for its 1QFY19. The quarterly net earnings increased by 8.4% QoQ and 4.4% YoY. Meanwhile, revenue stood at RM1262.0m, up 3.7% QoQ and 34.5% YoY.

• Within our and market expectation. 3MFY19 net profit was within our and consensus expectation by accounting for 26.4%/21.4% of our/consensus full year earnings forecast respectively.

Comment

• Stronger earnings QoQ impacted by higher revenue achieved. A lower EBIT margin of 1.0ppts in 1QFY19 as compare to 4QFY18, mainly due to lower operating income and weaker contribution from the vinyl glove segment. However, it is offset by higher revenue, thanks to better sales volume recorded.

• Stronger earnings YoY, thanks to higher sales revenue which offset lower margin. The Group recorded a higher EBITDA of 34% in 1QFY19 as compare to 4QFY18 due to higher sales volume achieved coupled with higher utilisation rate and better efficiency. Still, a lower PBT margin is reported mainly due to higher finance cost (ie. RM18.7m in 1QFY19 vs RM1.6m in 1QFY18).

• Continuous expansion to improved productivity. The process of expanding its existing facilities of F32 (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 (operational by early 2020) and F42 by end of FY2020 as guided by the management. This would boost the production capacity by extra 24% by the end of FY2020.

• Material Litigation against Adventa Capital. The next case management appeal against Low Chin Guan, Wong Chin Toh and ACPL would be on end of Jan 19 along with the Arbitration proceedings on May 2019. Based on legal advice, the Group believe that there is a likely chance of succeeding in this claim.

• Ongoing effort to improve performance of Aspion. The Group engineering, R&D and HR teams is focus on enhancing and improvement the glove production process.

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

Earnings Outlook/Revision

• We adjust upwards our earnings forecast FY19F and FY20F by 16.7% and 9.8% respectively as we account for higher sales revenue from Aspion and the new factory (ie. F32 and F33) respectively.

Valuation & Recommendation

• Upgrade to BUY with a higher target price of RM6.37 (previous target price of RM4.87). Our revised target price is now pegged at 33x FY20F EPS. Moving forward, we foresee a higher demand ahead along with the better performance from Aspion.

Source: JF Apex Securities Research - 18 Dec 2018