INVESTMENT HIGHLIGHTS

• Targeting 10% revenue and earnings growth annually

• Capturing demand from China

• Contraceptive manufacturing to start within 2 years

• Top Glove to continue benefitting from Special Reinvestment Allowance

• Maintain NEUTRAL with an unchanged TP of RM5.53

Targeting 10% revenue and earnings growth annually. Top Glove in its 4QFY17 analyst briefing stated that it is targeting to achieve at least a double-digit growth of 10% annually in terms of revenue and earnings. It plans to do this via both organic and inorganic growth. With regards to the inorganic growth, Top Growth is expected to announce a slew of new M&As in the coming months in order to support the required rate of growth for the company. The company is expecting to announce another acquisition aside from the Eastern Press in a month’s time. The company estimated that for FY18, it will be incurring about RM250m in CAPEX for existing plant and another RM42.75m for the acquisition of Eastern Press Sdn Bhd. However, it did indicate that the CAPEX spending would be higher should there be more M&As inked.

Capturing demand from China. In the recent earnings announcement, we note that vinyl gloves as well as TPE/CPE gloves for food and beverages have seen an increase in demand. Vinyl gloves registered an increase of +8%yoy in sales volume respectively. Meanwhile, production of TPE/CPE gloves surged by +107%yoy. We understand that this is due to the closure of several vinyl gloves plants in China due to the ban on using coal as a source of energy. The shortfall resulting from the ban is about 20% of the total vinyl gloves supply and this is expected to translate into better demand for nitrile, vinyl and TPE/CPE gloves from Malaysia.

Contraceptive manufacturing to start within 2 years. Management revealed during the briefing that its plan to venture into contraceptive manufacturing is underway. The company will start producing contraceptive within two years from now as it will require approval from several relevant authorities. It will start off with two manufacturing lines which will be producing 100m pieces of condom annually. The amount of CAPEX invested will be about RM50m for the total 20 manufacturing lines including machineries. In total, Top Glove is expecting to produce 1bn pieces a year once the 20 production lines are operational.

Top Glove to continue benefitting from Special Reinvestment Allowance. We note that in the FY17 earnings announcement, the effective tax rate for Top Glove was 13%. We understand that this is due to the special reinvestment allowance (SRA) benefit enjoyed by the company. The SRA which is valid for a period of three years will end in FY18 for Top Glove. Hence, according to the company, Top Glove’s effective tax rate will remain low at about 15% in FY18. In addition, it will also benefit from R&D allowance as well as an unutilised allowance of RM90m which can be used to offset the potential shortfall in earnings.

Earnings forecasts. We make no changes to our earnings forecast. Key risks to our earnings would be: (i) higher than expected increase in production costs i.e: raw material prices, labour costs etc and; (ii) further delays in plant expansions.

Maintain NEUTRAL with an unchanged Target Price (TP) of RM5.53. All factors considered, we reiterate our NEUTRAL call on Top Glove with an unchanged TP of RM5.53. Our valuation is premised on FY18 EPS of 28.95sen pegged to an unchanged PER of 19.1x which is the company’s 3-year historical average PER. We think this is fair as we believe all the positives have been priced in and the stock is now fully-valued. Additionally, we opine that despite the current improvement in raw materials price, the cost savings might be offset by: (i) lower ASPs - as a result of the low raw materials price and; (ii) the strengthening of Ringgit, which could limit its earnings potential going forward. We think that re-rating catalyst will be in the form of: (i) significant increase in volume sold; (ii) improvement in ASP and; (iii) launching a new innovative glove product.

Source: MIDF Research - 19 Oct 2017