Period  2Q15/1H15

Actual vs. Expectations  The 1H15 net profit of RM104.8m (+14.1% y-o-y) came in marginally above expectations at 53% and 55% of our and the consensus full-year net profit forecasts, respectively. The positive variance from our forecast is due to the stronger-than-expected US dollar.

Dividends  No dividend was proposed.

Key Result Highlights  QoQ, the 2Q15 revenue rose 0.8% to RM572.2m as the lower sales volume (-3%) and lower ASPs (-4%) were more than offset by the strengthening of US dollar against RM by 8%. However, QoQ, PBT rose 17.8% to RM69.6m mainly attributed to the lower raw material prices and stronger US Dollar, as well as quality enhancement initiatives which the Group had embarked on earlier. Raw material prices continued to trend down compared with 1Q15, as both natural rubber and nitrile latex prices fell by around 7.0%. As a result, PBT margin rose 2ppts to 12%. The stronger sales volume was driven by higher capacity utilisation as a result of ramp-up in demand for nitrile gloves, which accounted for 25% of overall sales. Correspondingly, 2Q15 PATAMI rose 15.2% to RM56.1m.

 YoY, the 1H15 revenue rose 2% as the higher sales volume (+4.5%) was more than offset by the lower ASPs. Note that nitrile and latex sales volumes rose 10% and 9%, respectively. However, QoQ, PBT rose by 14.9% to RM128.6m mainly attributed to the lower raw material prices and a stronger US Dollar, as well as its automation initiatives bearing fruits now. Raw material prices continued to trend downward compared with 2Q14, with natural rubber latex prices dropping by 24.8% to an average of RM3.63/kg, and nitrile latex prices declining by 5.3% to an average of USD1.03/kg.

Outlook  In the latest results briefing via a teleconference, management highlighted that sustainable EBITDA margin is about 13-15% (which is in line with our assumption) as compared to 2Q15’s EBITDA margin of 17%.

 Top Glove’s expansion plans are very much on track. Factory 29 came on-stream in Feb 2015, boosting the total number of production lines to 484 and increasing production capacity to 44.6b gloves per annum. Factory 29 also comes fitted with faster and technologically-advanced machinery, which means better efficiency and profitability. In the pipeline is the expansion of Factory 27 in Lukut, Port Dickson (to be completed by Dec 2015) and Factory 6 in Thailand (to be completed by July 2016), as well as the construction of a new facility, Factory 30 (to be completed by September 2016) which will respectively bring the number of production lines to 538 and capacity to 52.2b (+12%) gloves p.a by Sept 2016.

Change to Forecasts  We are raising our FY15E and FY16E net profits by 7.5-7.8% to take into account higher-than-expected volume growth and stronger-than-expected US dollar.

Rating & Valuation  We roll forward our valuation from CY15 to FY16. Correspondingly, our TP is upgraded from RM4.92 to RM5.45 based on unchanged 16x FY16E revised EPS. Maintain our MARKET PERFORM rating.

Risks to Our Call  Lower-than-expected volume sales. 

Source: Kenanga