1Q17 PATAMI of RM73.3m (+12% Q-o-Q; -43% YoY) came in at 19%/21% of our/consensus full-year net profit forecasts. We consider the results as slightly below expectations due to lower-than-expected ASPs. However, overall we are encouraged by the sequential earnings and margins improvement which we have highlighted and envisaged previously. We trim both FY17E and FY18E net profits. Correspondingly, our TP is downgraded from RM6.10 to RM5.92 based on unchanged 20x FY17E revised EPS.

Key Result Highlights

QoQ, 1Q17 revenue rose 9% to RM786m due to higher volume sales (+5%) and ASPs (+1%). This quarter marked the second consecutive quarterly sequential earnings improvement as envisaged in our previous reports. At pre-tax profit level, PBT rose 19% to RM89.8m, thanks to a 1ppts improvement in pre-tax margin from 10% in 4Q16 to 11% in 1Q17 due to higher ASPs, improvement initiatives focused on automation leading to better economies of scale and stronger USD vs MYR (estimated +4-5% QoQ). Correspondingly, 1Q17 PATAMI rose 12% to RM73.3m. No dividend was declared in this quarter as expected.

YoY, 1Q17 revenue decline 1.8% despite higher sales volume (+7%) offsetting lower ASPs (-6%). However, 1Q17 PATAMI was dragged down 43% due to the marked strengthening of the USD against the MYR and higher ASPs in 1Q16. Additionally, the full impact of the 24% hike in natural gas tariff and 11% increase in minimum wage which was not present in 1Q16, was also felt in 1Q17, which dragged down overall 1Q17 PATAMI.

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. This set of quarterly results marked the second consecutive quarterly earnings improvement of which we have envisaged previously. Most importantly the upwards continuous improvement in ASPs (2nd consecutive quarterly ASPs improvement) is pointing towards further margins expansion in subsequent quarters. The slower-than-expected new incoming capacities could lead to less intense nitrile glove competition, which appears to be subsiding and 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.

Over the next two to three quarters, Top Glove earnings will be underpinned by the just completed Factory 6 (Thailand; 1.4b pieces). Beyond Factory 6, Factory 30 (Klang), is being constructed and expected to commence production by April 2017. Concrete plans are also in place for Factory 31 (Klang), for which Phase 1 will commence by August 2017 with a production capacity of 1.6b gloves per annum and Phase 2, by May 2018, with a production capacity of 2.8b gloves per annum, bringing the total production capacity to 4.4b gloves per annum. By May 2018, the Group will have a total of 600 production lines and a production capacity of 56.8b gloves per annum.

Downgrading FY17E and FY18E net profits conservatively by 3% each to take into account lower ASPs. We expect improvement in sequential quarterly results going forward on the back of the sustained strength in USD against MYR.

Maintain OUTPERFORM. Correspondingly, our Target Price is lowered from RM6.10 to RM5.92 based on unchanged 20x FY17E revised EPS.

Source: Kenanga Research - 16 Dec 2016