1Q19 PATAMI of RM110.1m (+4.4% YoY; +7.7% QoQ) came in within expectations at 23%/22% of our/consensus fullyear forecasts. We are less optimistic about the short-tomedium prospects for Aspion as irregularities discovered could prove a setback, albeit temporary, and coupled with the impending legal case, the profit guarantees are at risk. TP is RM4.45 based on unchanged 23x FY19E EPS. Reiterate UP.

1Q19 PATAMI of RM110.1m (+4.4% YoY; +7.7% QoQ) came in within expectations at 23%/22% of our/consensus full-year forecasts. No dividend was proposed as expected.

Key result highlights. QoQ, 1Q19 revenue rose 3.7% due to higher sales volume (+1%) and flattish ASPs indicating that strong demand is tapering off. 1Q19 PBT fell 4.1% but PBT margin fell 0.5ppt to 11.2% from 11.7% in 4Q18 as improvement in production efficiency and new capacity coming on-stream was slightly offset by higher interest cost from the funding for M&As and organic expansion. This brings 1Q19 PATAMI to RM110.1m (+7.7%) due to a lower effective tax rate of 21.3% compared to 28.2% in 4Q18.

YoY, 1Q19 revenue rose 34.5% to a record high of RM1,262m due to higher sales volume (+19%) and ASP (+14%). The improved results followed strong demand growth stemming from developed and emerging markets from Asia, Eastern Europe and Latin America. 1Q19 PBT margin was crimped by 1.8ppt to 11.2% compared to 13.0% in 1Q18 due to higher interest cost from the funding for M&As and organic expansion which resulted in a lower PBT margin for this quarter. As a result, 1Q19 PATAMI was higher by 4.4% to RM110.1m due to higher effective tax rate of 21.3% compared to 13.2% in 1Q18. The effective tax rate was higher due to a deferred tax liabilities provision of RM5.7m in the current quarter, as compared with the previous year, where deferred tax liabilities were only provided for in 4Q18. As at end of this quarter, the group has an unutilised tax allowance balance of RM99m which can be utilised in subsequent quarters.

Shorter lead time indicating strong demand tapering off. We understand that the production of vinyl gloves in China has resumed and normalised in early 2018. Hence, over the past six months, delivery lead time (the time frame between order and delivery) has shortened from 60-70 days to 30-45 days; signs that the earlier strong demand is tapering off.

Outlook. Looking ahead, Top Glove is in the process of constructing several manufacturing facilities namely, Factory 32 (Phases 1 & 2 to be completed early-2019 and end-2019, respectively; 3.4b pieces), Factory 33 (operational by 4Q 2019; 1.2b pieces), Factory 5A (operational by 4Q 2019; 2b pieces), Factory F40 (operational by 4Q 2019 and 1Q 2020; 3b pieces), Factory F42 (operational by 3Q 2020; 2b pieces) and Factory 8A (operational by early 2020; 3.2b pieces) which will boost the Group’s total production capacity by 14.8b gloves per annum to 75.3b (+19.6%).

Maintain UNDERPERFORM. TP is RM4.45 based on 23x FY19E EPS (+1.0 SD above 5-year forward historical mean). We are feeling less optimistic about the short-to-medium prospects for Aspion as irregularities discovered could prove a setback, albeit temporary, and coupled with the impending legal case, the profit guarantees are at risk.

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

Source: Kenanga Research - 18 Dec 2018