1H18 PATAMI of RM214.5m (+37% YoY) came in within expectations at 48%/50% of our/consensus full-year forecasts. We expect earnings in subsequent quarters to gain momentum, underpinned by new capacity expansion and contribution from Aspion. TP is unchanged at RM9.40 based on 24.5x FY19E EPS (+1.5 SD above 5-year forward historical mean). Reiterate MARKET PERFORM.

1H18 results came in within expectations. 1H18 PATAMI of RM214.5m (+37% YoY) came in within expectations at 48%/50% of our/consensus full-year forecasts. We expect subsequent quarter’s earnings to gain momentum underpinned by new capacity expansion and contribution from Aspion. No dividend was proposed for the current quarter as expected.

Key Result Highlights. QoQ, 2Q18 revenue rose 2.2% due to higher sales volume (+3%) and higher ASPs (+4%). Correspondingly, PBT rose 2.1% to RM124.5m as PBT margin came in flat at 13% compared to 13% in 1Q18 due to improvement in production efficiency and with new capacity coming on-stream which more than offset higher nitrile latex price (+5%) and natural gas price (average +20%). However, 2Q18 PATAMI rose 3.4% to RM109m boosted by a lower effective tax rate of 11.7% compared to 13.2% in 1Q18.

YoY, 1H18 revenue rose 15.8% to register a record-high RM1,896.6m due to higher sales volume (+19%) and ASPs (+3%). The improved results followed strong demand growth stemming from developed and emerging markets. 1H18 PBT margin expanded by 1.2pp to 13.0% compared to 11.8% in 1H17 due to better economies of scale, improved productivity and higher ASPs offset by a marked increase in natural gas price. As a result, 1H18 PATAMI was higher by 37% to RM214.5m boosted by a lower effective tax rate of 12% compared to 19% in 1H17.

Outlook. Demand growth for natural rubber gloves stems from emerging markets, where healthcare awareness and hygiene standards are rising steadily, particularly Asia (ex-Japan) and Eastern Europe, which respectively saw 60% and 40% boost in sales volume for 1H18 compared with 1H17. Looking ahead, Top Glove is in the process of constructing 2 new manufacturing facilities namely, Factory 31 (operational by June 2018) and Factory 32 (operational by early 2019), which upon completion will boost the Group’s total number of production lines by an additional 78 lines and production capacity by 7.8b gloves per annum to 59.7b (+15%). Meanwhile, preparations for Top Glove's condom manufacturing facility have also commenced and expected to be operational by June 2018. Separately, the group has obtained approval from its shareholders to proceed with the proposed acquisition of Aspion, which is targeted to be completed by early April. Following the acquisition, Top Glove is projected to control 40 factories consisting of 34 glove factories and 6 other supporting factories, 693 glove production lines and a glove production capacity of 64.3b gloves per annum.

Maintain MARKET PERFORM. TP is unchanged at RM9.40 based on 24.5x FY19E EPS (+1.5 SD above 5-year forward historical mean). Reiterate MARKET PERFORM.

A key upside risk to our call is higher-than-expected sales volume.

Source: Kenanga Research - 16 Mar 2018