Result

• Top Glove reported a net profit of RM80.1m in 4QFY19,

up 7.2%% qoq but down 13.3% yoy. Meanwhile, quarterly revenue stood at RM1189.6m, -0.1% qoq and -2.8% yoy.

• For 12MFY19, the group attained a higher topline (+13.8% yoy), but lower bottomline (-12.7% yoy).

• Below expectations. Overall, 12MFY19 net profit accounts for 92%/91.4% of our/consensus full year estimates. The lower-than-expected earnings were mainly due to the spike in raw material prices (i.e. 22% surge in natural rubber prices).

Comment

• Better qoq earnings driven by lower tax expense. As compared to 3QFY19, the Group recorded flattish revenue (- 0.1% qoq) due to lower contribution from vinyl glove and natural rubber glove segment which offset higher contribution from nitrile glove segment. Also, a slightly lower PBT was recorded, -1.2% qoq, as dragged by higher latex prices as upward revision in selling prices since 3QFY19 still not sufficient to uplift the profit during this quarter. However, lower effective tax rate in 4QFY19 helped to lift the overall profit.

• Lower yoy earnings dragged by higher latex price. The Group recorded a lower revenue, -2.8%, dented by lower sales volume (-2%). Also, PBT/PBT margin dropped by - 41.0%/4.4ppts, with the impact of hike in natural latex price.

• Unfavourable 12MFY19 performance. The Group achieved a stronger sales revenue growth (+13.8% yoy) thanks to higher sales volume growth from nitrile glove (+30% yoy) and surgical glove (+46% yoy) segment, which offset lower sales volume growth from vinyl glove (-29%) segment. Again, lower PBT was recorded (-16.9% yoy) no thanks to higher operating expenses, bogged down by sharp spike of latex price (+22%).

• Dividend declared. The Group declared a final dividend of 4 sen/share. Total dividend for FY19 amounted to 7.5 sen/share, which translates into a dividend yield of 1.6% based on the current share price.

• Continuous 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 (+194 lines) and production capacity (+20.2b) by end of 2020. As such, the Group is projected to have 876 production lines along with a production capacity of 84.1b per annum.

• Oversupply in Vinyl glove segment. Year to date, Vinyl gloves sales volume have been decreased by 29% as a result

of increased competition in the vinyl glove segment in China. Looking forward, we expect a lower contribution from Vinyl glove segment. However, we do not expect significant impact, as it accounts for less than 8% of the Group total revenue.

• Unstable raw material prices. Looking forward, the Group expects a higher selling price for natural rubber glove after upward revision to its average selling price. However, we believe that the Group is still unable to fully offset the cost hike in 1QFY20. Yet, we foresee a slightly better operating margin in 1QFY20F as compared to 4QFY19.

• Risks include: 1) USD falls sharply against MYR, 2) heightened competition (i.e. nitrile segment), 3) potential overcapacity in the industry and 4) rising cost of material.

Earnings Outlook/Revision

• We revise downward our FY20F earnings forecasts by - 9.8% to RM396.1m as a result of lower-than-expected operating margin due to higher raw material prices (i.e. natural rubber price). We also introduce our FY21F net earnings of RM434.0m. Our net profits for FY20F and FY21F represent growths of 6.9% and 9.6% respectively.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM4.67 (previous target price of RM4.90) after our earnings downgrade. Our revised target price is now pegged at 30.1x FY20F PER (from 27.5x), which is at its 3-year historical mean PE.

Source: JF Apex Securities Research - 27 Sept 2019