INVESTMENT HIGHLIGHTS

• 2QFY18 earnings met estimates at RM109.0m

• 21%yoy growth in sales volume boosted revenue

• Better product mix resulted in improved margins

• FY18F earnings estimate maintained, FY19F earnings lifted by +3.0%

• Maintain NEUTRAL with a revised TP of RM9.19 per share

Within estimates. Top Glove’s 2QFY18 earnings came in at RM109.0m. This brings its 1HFY18 earnings to RM214.5m which is within our and consensus’ full-year earnings estimates at 50.2% and 49.6% respectively. Against the same period last year, revenue and earnings grew by +12.6% and +31.3% respectively whilst on a quarterly sequential basis; revenue and earnings increased marginally by +2.2% and +3.4% respectively. No dividend was declared for the quarter under review.

21%yoy growth in sales volume boosted revenue. The +12.6% growth in revenue year-over-year was mainly due to a +21% growth in sales volume. The growth in sales volume was driven by higher demand for rubber gloves stemming from increasing demand from emerging markets such as Asia (excluding Japan) and Eastern Europe where the healthcare awareness and hygiene standards are rising. The demand from emerging markets and Eastern Europe rose by +60% and +40% respectively due to the abovementioned factors. In addition, the yearover-year improvement in revenue is also attributable to: (i) higher utilization rate; (ii) higher average selling prices (ASPs) as well as; (iii) additional glove capacity from a factory acquired back in June 2017.

Better product mix resulted in improved margins. We note that the PBT and net margins have improved to low double digits in 1HFY18 (PBT: 13%, PAT: 11.3%) vs higher single digit margins in 1HFY17 (PBT: 11.8%, PAT: 9.6%). This may be attributable to an improved product mix that is skewed towards the rising demand from emerging markets as well as Eastern Europe. We opine that further improvement in margin can be expected post the successful acquisition of Aspion due to be completed in April as surgical gloves typically commands higher profit margin than examination gloves. Furthermore, continuous improvement in cost management and quality will also assist in improving the margins.

Earnings forecast. We are making no changes to our FY18F earnings estimates at this juncture as we believe Top Glove is on track to meet our earnings projection. However, we are revising our FY19F earnings by +3.0% as we lift our utilisation rate assumption for FY19F due to the better demand for gloves. Key risks to our earnings would be: (i) higher than expected increase in production costs i.e: raw material prices, labour costs etc; (ii) delays in plant expansions and; (iii) failed acquisition of Aspion.

Maintain NEUTRAL with a revised Target Price (TP) of RM9.19. Post earnings revision we are revising our TP to RM9.19 (from RM8.55 previously). Our valuation is premised on FY19 EPS of 39.9sen pegged to a higher PER of 23x which is +0.5SD of the company’s 3-year historical average PER to better reflect the earnings accretion coming from the acquisition of Aspion and the current earnings upcycle. However, we maintain our NEUTRAL recommendation as we believe all the positives have been priced in at this juncture 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

Source: MIDF Research - 16 Mar 2018