12M16 PATAMI of RM361.1m (+29% y-o-y) came in at 92%/96% of our/consensus full-year net profit forecasts. We consider the results as slightly below expectations due to lower-than-expected ASPs arising from intense price competition. We trim both FY17E and FY18E net profits by 5-9% after taking in account lower ASPs. Correspondingly, our TP is downgraded from RM6.68 to RM6.10 based on unchanged 20x FY17E revised EPS.

Key Result Highlights

QoQ, 4Q16 revenue rose 7% to RM722m due to higher ASPs (+7%) and flattish volume sales. However, PBT margin declined by 1ppts from 11% in 3Q16 to 10% in 4Q16, no thanks to price competition largely in the nitrile segment, higher minimum wage and natural gas tariff. However, the higher revenue offset the marginally lower margin, As a result, PBT rose 3% to RM75.8m. Correspondingly, 4Q16 PATAMI rose 5% to RM66m boosted by a lower effective tax rate of 13% compared to 15% in 3Q16. A DPS of 8.5 sen was declared, bringing total FY16 DPS to 14.5 sen which is above our expectation. YoY, 12M16 revenue rose 15% boosted by higher sales volume (+11%) which offset the lower ASPs (between -9% to -11%). However, increased competition in 2H16 led to a downward revision of the average selling price, while volatility in raw material prices and forex created a mismatch in the cost pass-through system which capped further margins expansion. PBT margin in 12M16 was 15% compared to 14% in 12M15 due to the reasons as explained above. This brings 12M16 PATAMI to RM361.1m (+29%).

Outlook. Due to the lag effect in passing cost through as a result of higher natural gas and raw material (latex) costs, Top Glove had since raised ASPs, which should contain high operating costs and put brakes on further margin compression in subsequent quarters. Recall, while pricing adjustments were made accordingly, there was a time lag of two months before the cost increase could be shared out with customers. Furthermore, we gather that nitrile glove competition has subsided on the back of slower new incoming capacities, which could ease downwards pressure on ASPs. As an indication, this quarter’s higher ASPs could well indicate that price competition has abated which should auger well for Top Glove’s earnings in subsequent quarters. Top Glove has plans to raise production capacity by additional 7.8bn pieces of gloves to 52.4b (+17%). The two plants; namely F27 (Lukut, Port Dickson expected has been completed in Aug 2016) and F30- Klang (commercial production by April 2017), will focus on producing 2.0b and 4.4b pieces of nitrile gloves, respectively. The F6 plant (in Phuket, Thailand targeted commercial production by April 2017) will cater for the production of latex gloves (1.4b pieces). Separately, the Group recently acquired a factory in Klang (Factory 31) estimated to produce 6b pieces of gloves per annum with Phase 1 targeted to be operational by mid-2017.

Downgrading FY17E and FY18E net profits by 5-9%. We downgrade our FY17 and FY18 net profit forecasts by 5-9% to take into account lower ASPs.

Maintain OUTPERFORM. Correspondingly, our Target Price is lowered from RM6.68 to RM6.10 based on unchanged 20x FY17E revised EPS. The PER valuation of Top Glove (16.4x FY17E PER) has lagged behind Hartalega (25.1x CY17E PER). The valuation gap should narrow when we consider that Top Glove has higher level of total capacity and net profit compared to Hartalega.

Source: Kenanga Research - 13 Oct 2016