Period

4Q15/FY15

Actual vs. Expectations

The FY15 net profit of RM280m (+55% y-o-y) beat our and market consensus full-year net profit forecasts by 8% and 11%, respectively. The positive variance from our forecast is due to the stronger-than-expected volume growth and margins.

Dividends

A final single-tier interim DPS of 12.0 sen was proposed, which came in above our expectation. This brings full-year FY15 DPS to 20.0 sen. We are raising our DPS in FY16E and FY17E from 18.0 sen to 20.0 sen each. Key Result

Highlights

QoQ, the 4Q15 register revenue growth of 7.3% to RM709m largely due to higher sales volume (+15%) and boosted by the strengthening of USD against MYR, estimated by 5-6%. However, QoQ, PBT rose 33% to RM134.5m mainly attributed to the lower raw material prices and stronger USD, as well as due to better efficiency thanks to automation and reengineering of production lines which the Group had earlier embarked on. PBT margin rose 400 bps to 19%. The stronger sales volume was driven by higher capacity utilisation as a result of ramp-up in demand for nitrile gloves, which accounted for 30-33% of overall sales. Correspondingly, 4Q15 PATAMI rose 43% to RM103m boosted by a lower effective tax rate of 23% compared to 28% in 3Q15.

YoY, FY15 revenue rose 10% as the higher sales volume (+8%) was more than offset by the lower ASPs. Note that nitrile and latex sales volumes rose 26% and 6%, respectively. However, QoQ, PBT rose by 68% to RM363m mainly attributed to the lower raw material prices and a stronger USD, as well as its automation initiatives, which are bearing fruits now. This brings FY15 PATAMI to RM280m (+55% YoY).

Outlook

Separately, Top Glove has proposed a 1 for 1 bonus issue, which is expected to further improved market liquidity.

Top Glove’s plans to raise production capacity by additional 7.8bn pieces of gloves to 52.4b (+17%) by end Dec 2016 are on track. The two plants namely F27 (Lukut, Port Dickson) and F30 (Klang) will focus on producing 2.0b and 4.4b pieces of latex gloves, respectively. F6 plant (in Phuket, Thailand) will cater for the production of latex gloves(1.4b pieces).

Change to Forecasts

We are raising our FY16E and FY17E net profits by 15.6- 14.7% to take into account higher-than-expected volume growth and better-than-expected margin improvement.

Rating & Valuation

Correspondingly, our TP is upgraded from RM9.16 to RM10.60 based on unchanged 20x FY16 revised EPS (slightly above its 5-year historical mean average of 18x). Top Glove’s historical valuation at peak earnings averaged at between 23-27x PER. The PER valuation of Top Glove (16x FY16E PER) has lagged its peers and it is trading at an average 25% discount to Kossan (22x FY16E PER) and Hartalega (26x FD CY16 PER). We consider the underperformance as unwarranted. The valuation gap should narrow when we consider that Top Glove has similar/higher total capacity and net profit level compared to Kossan and Hartalega. We like Top Glove for: (i) its ability to evolve from purely a dominant latex-based rubber gloves producer into a higher margin nitrile-based products producer, (ii) undemanding PER valuation at discount to peers, and (iii) solid management.

Risks to Our Call

Lower-than-expected volume sales.

Source: Kenanga Research - 16 Oct 2015