Trading at +0.5 SD to Mean; Maintain HOLD

• TOP GLOVE's 1QFY2020 results were above ours and consensus expectations due to low tax rate. Sequential earnings could be slightly lower due to the rising latex cost.
• We raise our FY20-22E EPS by 10-13%, mainly to impute for the lower tax. Consequently, our Target Price is raised to MYR4.75 (+11%), on an unchanged 26x CY20F P/E (10% discount to our target P/E for Hartalega (HART MK, SELL, Target Price MYR4.95). Maintain HOLD.
• Our preferred pick is Kossan (BUY, Target Price MYR4.85) for its exposure to the non-medical segment and undemanding CY20E P/E of 22x.

Above Expectations

• Top Glove's 1QFY20 net profit of MYR111m (+39% q-o-q, +1% y-o-y) was 28%/26% of our and street’s full-year estimates. Results were above our expectation due to the low tax rate of 11% (vs. our assumption of 20%).
• Given the available tax incentives, management has guided for its tax rate to be 13-15% in FY20F.

1QFY20: Stronger Q-o-q But Weaker Y-o-y

• Q-o-q, 1QFY20 net profit rebounded (+39% q-o-q) on:
  1. higher sales volume (+6% q-o-q) as the strong nitrile sales volume (+12% q-o-q) more than offset for the weaker latex powdered sales volume (-6% q-o-q);
  2. higher EBITDA margin (+3.5-ppt q-o-q) on lower raw material costs (latex: -11% q-o-q, NBR: -2% q-o-q).
• However, on a y-o-y basis, PBT was dragged by the weaker latex gloves given the structural demand shift to nitrile and competition. Additionally, the gross margin of latex gloves was around 2- ppt lower than that of nitrile.

Raise FY20-22F EPS by 10-13%

• Some of its latex powdered lines have been converted to nitrile powdered lines. Coupled with the new capacity, nitrile is now its biggest revenue contributor (c.52% of total revenue).
• We also note that it has reduced its planned new capacity for CY20 to 11.8b pcs p.a. (18.2b pcs p.a. previously), which may alleviate a potential supply overhang in 2020.
• We raise our FY20-22F EPS by 13%/10%/10% as we:
  1. lower our assumed tax rate to 13% (-7-ppt);
  2. increase the sales volume of the higher margin nitrile gloves by 2% p.a.

Source: Maybank Research - 18 Dec 2019