• 3QFY17 below expectations

• Revenue driven by increase in sales volume and ASPs

• Earnings marred by increase in raw materials prices

• Further changes to capacity expansion timeline

• Maintain NEUTRAL with a revised TP of RM5.00 per share

3Q17 earnings below expectations. Top Glove registered 3QFY17 revenue and earnings of RM869.6m and RM77.7m respectively. This brings its 9MFY17 earnings to RM234.1m which is below ours and consensus’ earnings forecasts, accounting for 69% of full year earnings estimates. During the quarter, improvements were seen on a year-overyear basis with revenue and earnings registering growth of +29.4% and +24.4% respectively. On a quarterly sequential basis, revenue grew marginally by +2.1% while earnings contracted by -6.4%. A first interim dividend of 6.0sen was also declared for the quarter under review which represents a payout of 96%.

Revenue driven by increase in sales volume and ASPs. During the quarter, the improvement in revenue was due to the sales volume registering a decent growth of +5%yoy. In addition, the better revenue was also driven by the increase in average selling prices (ASPs) undertaken by Top Glove back in October and December last year. Furthermore, we opine that the more favourable USD exchange rate during the quarter at RM4.39 per USD vs RM4.00 per USD in 3QFY16 assisted in the revenue growth. However, the increase in ASPs has also worked against Top Glove as it had resulted in volume contraction by - 5%qoq as the higher ASPs have led to some orders to be deferred.

Earnings marred by increase in raw materials price. Despite registering a +29.2%yoy growth in revenue, earnings during the quarter was marred by the increase in raw materials price. During the quarter, the average latex price surged to a five-year high of RM8.16 per kg, which is an increase of >80%yoy. Meanwhile, the average price of nitrile also increased to USD1.41 per kg, an increase of +33%qoq and +41.1%yoy.

Further changes to capacity expansion timeline. We understand from the management that Top Glove’s factory 30 (F30), factory 31 (F31) and factory 32 (F32) commissioning will be slightly delayed from the previous timeline given. F30 which is expected to be commissioned in June has been pushed back to July while F31 and F32’s commissioning have been pushed to January 2018 from November 2017. Additionally, the two newly acquired factories in Nilai and Muar with a combined capacity of 1.1b pieces are expected to be commissioned in August 2017 post completion of the acquisitions of both plants.

Earnings forecasts. We are revising down our earnings forecasts for FY17-18F by -6.9% and -2.2% respectively as we input higher production costs as well as the changes in its capacity expansion timeline. Key risks to our earnings would be: (i) lower-than-expected production costs i.e: raw material prices, and; (ii) further delays in plant expansions.

Maintain NEUTRAL with a revised Target Price (TP) of RM5.00. Following our earnings revision, we reiterate our NEUTRAL call on Top Glove with a revised TP of RM5.00 (from RM5.11 previously). Our valuation is premised on FY18 EPS of 27.8sen pegged to an unchanged PER of 18x which is the company’s 5-year historical average PER. Despite the fact that raw materials price have slowly recovered from its peak back in February, we continue to be wary of the movements of currency as well as raw materials price which could have an adverse impact on its earnings. Additionally, we also wary on the delay in its capacity expansion as this could potentially further disrupt its revenue and earnings growth going forward.

Source: MIDF Research - 19 Jun 2017