Positive Mismatch 4QFY19E; HOLD With Higher Target Price

• Sequential earnings could improve substantially on higher latex glove ASPs and seasonally lower latex costs. Although we maintain our forecasts, we raise our Target Price by 9% to MYR4.85 on a higher CY20E P/E target P/E of 26x from 24x; This is in view of its rising margin/ROE prospects due to Aspion’s surgical gloves and inclusion in FBMKLCI 30 since Dec 2018.
• Our new target is still 10% below our 29x target for Hartalega due to TOP GLOVE’s lower margins/ROEs.
• Maintain HOLD as we believe its positives have been priced in.

Stronger Earnings Ahead

• Top Glove's 3QFY19 net profit, down 29% q-o-q and 37% y-o-y, was hit by high latex costs and intense competition. However, we expect earnings to improve substantially in 4QFY19E as latex-glove ASPs have already been raised to reflect the higher latex costs while latex costs are expected to be seasonally lower.
• Additionally, new capacity from F32-33 (+6% to 63.9b pcs in Jun 2019) may lift sales volumes. Plant utilisation is high at 90%, excluding F32-33.

Delays to Plant Expansion

• Expansion of another eight plants has been delayed by 3-6 months. Management attributes this to delays in construction and gas-supply issues.
• Separately, Top Glove recently launched its new nitrile biodegradable glove which could yield better margins as its ASP is 10% above those of normal examination gloves.
• Our earnings model assumes sales volume growth of 14%/11%/11% for FY19-21E.

Limited Benefits From US Trade Tiff

• We think Top Glove may not benefit much from a potential 25% tariff on China’s medical gloves. Top Glove has a bigger presence in non-US markets, which may be disrupted if China diverts its gloves from the US to these markets.
• It may also not benefit much from a potential removal of Thailand/Indonesia from the US GSP list.
• Non-medical rubber gloves produced by Top Glove’s factories in Malaysia are not substantial, at < 10% of its sales volume.

Source: Maybank Research - 27 Jun 2019