INVESTMENT HIGHLIGHTS

• 4QFY17 earnings within expectations

• Revenue driven by increase in sales volume and ASPs

• Newly commissioned plants boosted revenue

• Proposed acquisition of Eastern Press

• Maintain NEUTRAL with a revised TP of RM5.53 per share

4Q17 earnings within expectations. Top Glove registered 4QFY17 revenue and earnings of RM902.4m and RM98.6m respectively. This brings its FY17 earnings to RM332.7m which is within ours and consensus’ full-year earnings estimates. During the quarter, improvements were seen on a year-over-year basis with revenue and earnings registering growth of +25% and +50.2% respectively. On a quarterly sequential basis, revenue grew marginally by +3.8% while earnings grew by +26.9%. A final interim dividend of 8.5sen was declared for the quarter under review representing a payout of 54.7%.

Revenue driven by increase in sales volume and ASPs. During the quarter, the improvement in revenue was mainly attributable to the sales volume registering a double digit growth of +13%yoy and +14%qoq. In addition, the better revenue was also driven by the increase in average selling prices (ASPs) by +5.0%yoy. This was partly due to the increase in average natural rubber and nitrile butadiene prices by +46.4% and +11.9%yoy respectively against last financial year. Furthermore, we opine that the more favourable USD exchange rate during the quarter at RM4.28 per USD vs RM4.04 per USD in 4QFY16 assisted in the revenue growth. We also note that overall margins for FY17 have improved due to the better performance in the fourth quarter of FY17.

Newly commissioned plants boosted revenue. We understand from the management that the double-digit growth in volume sold is mainly attributable to the commissioning of three new production plants. Plants F30, F33 and F34 which began commissioning since early August 2017 have positively contributed to the revenue of Top Glove despite being operational for only a month. According to management, F33 and F34 have been fully commissioned but F30 is only running at 20-30% of its capacity. We expect the rest of F30’s production capacity to be operational by end of CY17.

Proposed acquisition of Eastern Press. Further to the earnings announcement, management also declared that it intends to acquire Eastern Press Sdn Bhd (Eastern Press) for an estimated amount of RM42.25m. Eastern Press is a company that is principally engaged in printing and supplying of packaging materials and it is currently supplying these services to various Top Glove subsidiaries. It is understood that the acquisition will provide synergy to Top Glove in terms of improving its supply chain coordination and increasing operational efficiencies. The acquisition is to be funded wholly in cash and further details will be provided post-execution of SPA.

Earnings forecasts. Due to the improved earnings performance, we are revising up our earnings forecasts for FY18F by +2.7% as we input higher ASP due to the anticipation of the increase in both raw materials prices as well as new production capacities coming in FY18. 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 RM5.53. Following our earnings revision, we reiterate our NEUTRAL call on Top Glove with a revised TP of RM5.53 (from RM5.15 previously). Our valuation is premised on FY18 EPS of 28.95sen pegged to PER of 19.1x which is the company’s 3-year historical average PER. We opine that this is fair given that we believe all the positives have been priced in at this juncture. Despite the fact that raw materials price have slowly recovered from its peak back in February 2017, 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 any potential delay in its capacity expansion as this could disrupt its revenue and earnings growth going forward.

Source: MIDF Research - 16 Oct 2017