• Top Glove reported a net profit of RM111.7m in 1QFY20, up 50.1% QoQ and 1.2% YoY. Meanwhile, quarterly revenue stood at RM1209.1m, +1.7% QoQ but -4.2% YoY.
• Within our expectation and consensus. 1QFY20 net profit accounts for 28.0%/26.0% of our/consensus full year estimates.

• Flattish YoY performance. Top Glove’s revenue came down 4.2% YoY due to lower selling price of nitrile (-8% YoY) and latex (-3% YoY) amid marginally higher sales volume (+0.2% YoY). The Group’s operating profit decreased 11.4% YoY because of higher natural gas price (+6% YoY), natural rubber latex (+9% YoY) and fierce competition in natural rubber glove segment. Hence, 1QFY20 profit before tax went down to RM125.5m (-11.6% YoY). Still, the group recorded marginally high YoY net profit to RM111.7m (+1.2%) because of lower tax expenses (-54% YoY) pertaining to tax incentives.
• Commendable QoQ result. The Group recorded positive gain for revenue (+1.7% QoQ), operating profit (+46.6% QoQ), and net profit (+50.1% QoQ). This were largely contributed by strong sales volume growth from higher margin of nitrile gloves (+12% QoQ), profit margin expansion of higher natural rubber glove average selling price, USD appreciation against RM (+0.5%), lower raw material prices (natural rubber -11% QoQ) and (nitrile latex -2% QoQ), coupled with narrowing losses from vinyl glove segment. Also, better results from Aspion underpinned the overall bottom line.
• Expansion plans are on track. The Group will continue its expansion of existing facilities and the construction of new facilities, which will boost the total production line (+178 lines) and production capacity (+21.3b/30.3%) by end of 2021. Hence, the Group is projected to have 861 production lines along with a total production capacity of 91.4b per annum. Notably, 6 out of 8 new plants will be setting for nitrile glove with approximately extra 130 lines of production cum 16.2b capacity.
• Stabilizing raw material prices. Average latex concentrate prices continued their downward trend by falling 11% from RM4.64/kg in 4QFY19 to RM4.13/kg during 1QFY20. Looking forward, we believe this will persist in the subsequent months as Thailand has been pushing more natural rubber exports in this calendar quarter. Meanwhile, average nitrile latex price was at USD1.06/kg, down 14.5% YoY. This is likely to continue, albeit at a slower pace, as supply shortage problem diminished. We are looking at softening natural gas price, probably will be reduced by 2.96% in 1H2020.
• Risks include: 1) USD falling moderately against MYR, 2) Price war (i.e. nitrile segment), 3) Sluggish sales from Latin America and 4) Labour shortage.

• We revise upward our FY20F earnings forecasts by +17.5% to RM465.4m as a result of higher operating margin. We also introduce our FY21F net earnings of RM 534.1m. Our net profits for FY20F and FY21F represent growths of 26.6% and 14.8% respectively.

• Maintain HOLD with a higher target price of RM4.73 (previous target price of RM4.67) after our earnings upgrade. Our revised target price is now pegged at 26x FY20F PER, which is at 3-year historical mean PE on the back of brighter outlook in respect of resilient glove demand and favorable raw material prices moving forward.

Source: JF Apex Securities Research - 19 Dec 2019