• 1Q17 earnings below expectations
   
• Costs increases cushioned by rise in sales volume

• Gradual improvement in profit margins a positive sign

• Capacity expansion timeline unchanged

• Maintain NEUTRAL with a revised TP of RM5.31 per share

1Q17 earnings below expectations. Top Glove registered 1QFY17 revenue and earnings of RM785.6m and RM73.3m respectively which is below our and streets’ expectations, accounting for 19.5% of FY17 full year earnings estimates. During the quarter, revenue slipped marginally by -1.8% while PATAMI declined by -42.9% year-over-year mainly attributable to a less favourable exchange rate against the same period last year. However, on a quarterly sequential basis, revenue and PATAMI both increased by +8.8% and +11.7% respectively.

Costs increases cushioned by rise in sales volume. According to the management, the sales volume during the quarter registered a healthy growth of +7%yoy and +5%qoq. Despite registering a healthy sales volume growth, earnings during the quarter was marred by: (i) full impact of 24% hike in natural gas tariff and 11% increase in minimum wage; (ii) fluctuating raw material prices especially latex which increased by +12.6% to RM4.46 per kg during the quarter, as well as; (iii) less favourable movements in foreign exchange rates at an average of RM4.27 per USD in 1Q17 vs an average of RM4.32 per USD in 1Q16.

Gradual improvement in profit margins a positive sign. We also note there are improvements in terms of profit margins quarter-overquarter despite the persistent pressure on average selling prices (ASP). During the quarter, Top Glove registered a PBT margin of 11.4% - the highest in three consecutive quarters post the period of strong USD appreciation late last year. We think this a positive sign of recovery in terms of production as well as competitiveness.

Capacity expansion timeline unchanged. We understand from the management that Top Glove’s Factory 6 (F6) is finally operational as of November 2016. This adds up about 1.4b of capacity for natural rubber gloves to the company. As for the rest of the factories i.e: Factories 30 and 31, the original timeline for operation is still intact for now and management expects these two factories to contribute 10.8b capacity for nitrile glove production by May 2018

Source: MIDF Research - 16 Dec 2016