9M17 PATAMI of RM234.1m (-21% YoY) came in below expectations at 65%/69% of our/consensus full-year net profit forecasts. The negative deviation from our results was due to higher-than-expected raw material input cost. We expect buyers to return to the market post the wintering months as lower ASPs in line with lower raw material prices to boost re-stocking activities. We trim our FY17E net profit by 9% but maintain our FY18 net earnings. Reiterate OUTPERFORM and TP of RM6.10 based on unchanged 20x FY18E EPS.

Key Result Highlights

QoQ, 3Q17 revenue rose 2% due to higher ASPs (+9%) which more than offset lower volume sales (-5%). At pre-tax profit level, PBT fell 11%, no thanks to a 1ppts crimp in pre-tax margin from 12% in 2Q17 to 11% in 3Q17 due to timing lag in passing on cost to the customers, as average prices for natural rubber latex and nitrile latex rose 18.7% and 24.1%, respectively. However, the impact of rising raw material costs and 5% decline in sales volume was mitigated by operational efficiencies as well as efficient costs management. Correspondingly, 3Q17 PATAMI fell 6% to RM77.7m. A single-tier DPS of 6.0 sen was declared, which is within our expectation.

YoY, 9M17 revenue rose 16% due to higher volume sales (+5%) and ASPs (+7%). However, 9M17 PATAMI was dragged down 21% due to margins compression due to lag effect in passing on cost to customers as a result of the higher-than-expected raw material cost. Additionally, note that the lower YoY results were due to relatively stronger numbers during 1H16 (owing to a stronger US Dollar and lower raw material prices back then).

Outlook. The Group is optimistic of better sales volume growth in 4Q17 as raw material prices have started to trend downwards. Post wintering months lasting between Dec till April, we expect input latex cost to trend downwards and hence re-stocking activities to pick up again.

Over the next two to three quarters, Top Glove’s earnings will be underpinned by the completed Factory 6 in Dec 2016 (Thailand; 1.4b pieces). Beyond Factory 6, expansion plans include the construction of 3 new manufacturing facilities in Klang, namely Factory 30 (operational by July 2017), Factory 31 (operational by January 2018) Factory 32 (operational by December 2018), Factory 33 & 34 (recently acquired). Upon completion, these factories will boost the Group’s total number of production lines by an additional 128 lines and production capacity by 11.7b gloves per annum gradually over a period of between end 2018 and FY19.

Trimmed our FY17E net profit by 9% but maintain FY18E. We trim our FY17E net profit by 5% to take into account higher-than-expected raw material cost. However, we maintain our FY18 earnings forecasts.

Maintain OUTPERFORM. TP of RM6.10 is based on an unchanged 20x FY18E EPS. The PER valuation of Top Glove (18.4x FY18E PER) has lagged behind Hartalega (30.8x CY18E PER). The valuation gap should narrow considering that Top Glove has a similar level of net profit compared to Hartalega. Reiterate Outperform. Key risks include higher-than-expected raw material cost and lower-than-expected ASPs.

Source: Kenanga Research - 19 Jun 2017