INVESTMENT HIGHLIGHTS

• FY18 earnings came in within ours and consensus estimates

• 4QFY18 revenue boosted by higher sales volume, particularly from emerging markets and Eastern Europe

• However, higher effective tax rate partially impacted 4QFY18 earnings

• Maintain NEUTRAL with an unchanged TP of RM10.80

Within estimates. Top Glove’s 4QFY18 earnings came in at RM101.6m. This translates into an increase of +3.0%yoy. The improvement in earnings was mainly supported by higher production volume which was partially impacted by higher effective tax rate. This brings its FY18 earnings to RM433.6m which is within our and consensus’ full-year FY18 earnings estimates at 100.6% and 97.7% respectively.

+27.0%yoy growth in sales volume boosted 4QFY18 revenue.The +34.8%yoy growth in revenue was mainly due to a +27.0%yoy 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. In addition, the year-over-year improvement in revenue is also attributable to the: (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.

However, 4QFY18 earnings dragged by a higher tax. Driven by higher revenue, 4QFY18 profit before tax (PBT) rose by +43.3%yoy to RM142.0m. In addition, the increase in PBT was driven by application of advanced technology. This improves operational efficiency, product quality and reduction in manpower requirements. Nonetheless, a smaller growth of +3.0%yoy in earnings was recorded as the income tax expense in 4QFY18 was higher. The effective tax rate for 4QFY18 to 28.2% from 0.9% in 4QFY17. This raised the tax expense by about RM39.1m year-over-year.

Final dividend of 10.0sen per share declared. Final dividend of 10.0sen per share declared for FY18 subject to shareholder approval at the forthcoming AGM. This brings the total FY18 dividend payout to 17.0sen per share.

Earnings forecast. We are making no changes to our FY19F earnings estimates pending analysts’ briefing on 17th October 2018.

Maintain NEUTRAL. We are maintaining our TP to RM10.80. Our valuation is premised on CY19 EPS of 43.2sen pegged to an unchanged PER of 23x which is +0.5SD of the company’s 3-year historical average PER. We are maintaining our NEUTRAL recommendation. We opine that despite the current improvement in raw materials price, the cost savings might be offset by lower ASPs as a result of the low raw materials price (natural rubber latex). In addition, we believe all the positives have been priced in at this juncture and the stock is now fully-valued.

Source: MIDF Research - 12 Oct 2018