A happy new year

Maintain HOLD. We maintain our HOLD call for Top Glove with a higher TP RM4.80. We believe near term earnings will be boosted by the strong USD. However, we are remain cautious as the positive impact from the strong USD may be negated by rising operating costs, as natural gas tariffs and raw material prices could increase further.

Expansion still ongoing. Top Glove is gearing up to increase its nitrile glove segment by increasing its capacity in this segment. The expansion plans are underway such as Factory 30 in Klang (April 2017) and Factory 31 in Klang (Phase 1 in August 2017, Phase 2 in May 2018), and will raise total production capacity to 56.8bn gloves p.a. (+18% from current capacity of 48.0bn p.a.).

Profitability to normalise in FY17/18F. We forecast EBIT/k gloves to decrease in FY17F, as we factor in higher operating costs as well as USD gains. We believe the exceptional 1H16 showing will not be replicated given the unfavourable conditions. Our EBIT/k glove assumptions are conservative vis-�-vis the record- breaking level in FY16, as we expect EBIT/k gloves to normalise in FY18-19F.

Valuation

Maintain HOLD. We maintain our HOLD recommendation with a TP of RM4.80. Our TP is based on 17x CY17F EPS (previously 16x CY17EPS) which is +0.5SD of its 5-year mean EPS. Our PE multiple reflects it?s near term earnings growth.

Key Risks to Our View

Rising competition could erode margins. Competition is heating up in the glove sector with several glove makers expanding aggressively. This could results in higher pressure on margins.

Source: Alliance Research - 06 Jan 2017