Result

• Top Glove reported a net profit of RM105.8m in 2QFY19, down 3.9% qoq and 3.0% yoy. Meanwhile, quarterly revenue stood at RM1160.0m, down 3.9% qoq, while up 21.0% yoy.

• For 1HFY19, the group attained a higher topline (+27.7% yoy), and a flat bottomline (+0.6% yoy).

• Earnings within ours but below market expectation.

Overall, 1HFY19 net profit accounts for 45.1%/42.9% of our/consensus full year estimate.

Comment

• Lower earnings qoq. A Lower revenue recorded mainly due to lower average selling price (ASP) from downtrend in raw material costs and pricing pressure which offset a higher sales volume (+1.0% yoy). Meanwhile, weakening of USD vs MYR resulted in disappointing PBT/PBT margin of -24.8%/-2.0ppts.

• Weaker earnings yoy. The Group achieved a stronger sales volume growth (+16% yoy) with a higher ASP, and further enhancements in quality and operational efficiency, resulting in a higher operating profit (+16.1% yoy). However, a lower PAT was recorded no thanks to higher tax expenses (i.e. reduction in tax allowance, expiry of special reinvestment allowance and higher deferred tax liabilities).

• Slightly better result for 1HFY19. Again, better sales volume (+18% yoy) and operational efficiency contributed to a higher revenue in 1HFY19 (+27.7% vs. 1HFY18). Despite that, a higher finance cost (RM38.5m in 1H19 vs. RM4.3m in 1HFY18) mainly incurred from the acquisition of Aspion, which resulted in a flat net profit.

• Continued expansion to improve productivity. The Group will continue its expansion of existing facilities and the construction of new facilities, which will boost the total production line (+200 lines) and production capacity (+80.9b) by end of 2020. As such, the Group is projected to have 848 production lines along with a production capacity of 80.9b per annum.

• Issuance of Exchangeable Bond. The purpose of the bonds was to retire existing borrowings from Aspion. As such, it will benefit the company in terms of lower interest cost, as well as improve cash flow (+RM19m yoy).

• Still resilient for its bottom line amid flat top line. We envisage the Group will have a flattish sale volume growth ahead due to potential oversupply from rubber glove segment. As such, revenue will be flat unless there are growths from other new businesses (ie. printing, chemical business and Aspion), in our view. On the other hand, we foresee a better

profit margin in 2HFY19 due to lower finance cost, as well as lower tax expenses thanks to unutilised tax allowance.

• Risks include: 1) USD falls sharply against MYR, 2) heightened competition (i.e. nitrile segment), and 3) Potential overcapacity in the industry.

Earnings Outlook/Revision

• We slightly revise down our FY19F and FY20F earnings forecasts by 6.4% and 5.3% to RM456.1m and RM468.7 respectively as we foresee weakening of USD against MYR, coupled with lower sales volume growth.

Valuation & Recommendation

• Maintain BUY with a lower target price of RM4.95 (previous target price of RM6.37) after our earnings downgrade and strengthening of MYR against USD. Our revised target price is now pegged at 27.1x FY20F EPS, which is +0.5 SD above its 3 years historical mean PE.

• We continue to favour Top Glove for its: 1) Stable profit margin of around 9%~10% due to effective cost management, 2) Strong fundamental and positive long term outlook, and 3) Strong relationships with reputable clients.

Source: JF Apex Securities Research - 25 Mar 2019