1Q18 PATAMI of RM105.4m (+44% YoY; +7% QoQ) came in within expectations at 24%/28% of our/consensus full-year forecasts. We expect subsequent quarter’s earnings to gather momentum underpinned by new capacity expansion and contribution from Aspion. We roll forward our base year from FY18 to FY19 to better reflect earnings contribution expected from Aspion. TP is raised from RM7.60 to RM8.20 based on 21.5x FY19E EPS. Reiterate OUTPERFORM.

Expected. 1Q18 PATAMI of RM105.4m (+44% YoY; +7% QoQ) came in within expectations at 24%/28% of our/consensus full-year net profit forecasts. We expect subsequent quarter’s earnings to be better underpinned by new capacity expansion and earnings contribution from the expected completion of Aspion. No dividend was proposed for the current quarter as expected.

Key Result Highlights. QoQ, 1Q18 revenue rose 4% due to higher volume sales (+8%) which more than offset lower ASPs (-2%). However, PBT rose 23% to RM99.1m as PBT margin expended 2.0pp to 13% in 1Q18 from 11% in 4Q17 due to improvements in production efficiency and quality, coupled with new capacity coming onstream. However, 1Q18 PATAMI rose 7% to RM105.4m as effective tax rate normalised to 13% compared to 1% in 4Q17.

Record revenue. YoY, 1Q18 revenue rose 19% to register a record high of RM938.1m due to higher volume sales (+14%) and higher ASPs (+2%). The improved results followed strong demand growth stemming from developed and emerging markets. Additionally, the disruption in vinyl glove supply following China’s strict enforcement against polluting industries, which benefited both natural rubber and nitrile glove sales. This brings 1Q18 PATAMI higher by 44% despite higher raw material cost. Raw material prices in 1QFY18 were on the uptrend compared with 1QFY17, with average natural rubber latex and nitrile latex prices higher by 12.1% and 3% respectively.

Outlook. Given their sheer size, we are expecting margins to improve going forward due to ongoing enhancements in the manufacturing process, which enabled the Group to manage costs more efficiently, reduce wastage and upgrade glove quality. These include initiatives to reduce downtime and conserve heat energy, electricity and water. Looking ahead, the group’s expansion plans include the construction of two new manufacturing facilities, i.e. Factory 31 (operational by Mar 2018) and Factory 32 (operational by Dec 2018), which upon completion will boost capacity by 7.8b gloves per annum. By end Dec 2018, Top Glove is projected to have a production capacity of 59.7b (+15%) gloves per annum.

Maintain OUTPERFORM. We roll forward our base year from FY18 to FY19 to better reflect new earnings contribution expected from Aspion. Correspondingly, our TP is raised from RM7.60 to RM8.20 based on an unchanged 21.5x FY19E EPS (+1.5 SD above 5-year historical mean to better reflect Top Glove’s pursuit to grow via acquisition). Top Glove personifies a company evolving from good to great via consistently enhancing earnings and shares value. The PER valuation of Top Glove (19.6x FY19E PER) is trading at unjustifiably steep discount to Hartalega (36.0x FY19E PER). The valuation gap should narrow considering that Top Glove has a similar level of net profit and growth rate compared to Hartalega.

A key risk to our call is the proposed Aspion acquisition deal falling through.

Source: Kenanga Research - 20 Dec 2017