Earnings upgraded; TP raised

Upcoming 1QFY8/17 results will be another record quarter, throwing brokers’ forecasts out the window. Top Glove has regained its bellwether status with the sector’s highest profitability and we think the market has yet to recognise this. We raise our FY8/16-18 EPS by 16%/12%/5% on higher USD/MYR assumption. Subsequently, our TP is raised to MYR16.60 (+54%) as we roll forward our valuation to CY17 and also attach a higher PER target of 25x (inline with our target PERs for Hartalega and Kossan).

1QFY8/17 to overshoot expectations?

1QFY8/17 results is scheduled to release on 15th Dec and we expect net profit of c.MYR120m (+16% QoQ, +147% YoY), representing 35% of our and 38% of Street’s full-year forecasts. The sequentially stronger earnings would be due to: (i) higher revenue on higher sales volume (c.+3% QoQ, c.+15% YoY) and higher USD/MYR (+11% QoQ, +31% YoY), while ASPs are largely unchanged; (ii) margin expansion on better production efficiency, lower rubber prices and higher USD/MYR; (iii) lower effective tax rate of c.20% (-3-ppt QoQ, +3-ppt YoY) on higher reinvestment tax allowance.

Balanced product mix; Raising efficiencies

Top Glove adopts a balanced product mix strategy and we expect more diversification ahead through a potential small M&A. Presently, while it enjoys the volume growth in the nitrile segment, it also benefits from the margin expansion in the less competitive latex segment (gross margin of latex gloves is 2-3-ppt above that of nitrile). Also, its latest plant F29 boasts productivity of 40,000 pcs/hour/line, similar to Hartalega and Kossan’s 40,000-45,000.

Highest profitability but cheapest big-cap valuation

We note that Top Glove has regained its bellwether status with the sector’s highest profitability and its financial metrics (margins and ROE) are also comparable to its big-cap peers. Post our earnings revisions, the stock is only trading at 2016 PER of 17x (vs. Hartalega: 29x, Kossan: 24x).

Source: Maybank Research - 10 Dec 2015