INVESTMENT HIGHLIGHTS

• 2QFY19 earnings came in at RM105.8m (-3.0%qoq), lagged ours and consensus estimates

• Heightening competition led to lower ASP, while insignificant addition in capacity resulted in minimal volume growth

• Management remain committed to expand capacity

• Maintain NEUTRAL with a revised TP of RM4.75

Lagged estimates. Top Glove’s 2QFY19 earnings came in at RM105.8m. This translates into a sequential earnings contraction of - 3.0%qoq. Cumulatively, this bring its 1HFY19 earnings to RM215.8m, which lagged our and consensus’ full-year FY19 earnings estimates at 41.0% and 42.9% respectively.

Lower ASP and marginal growth in production volume. The lower earnings recorded on quarter-on-quarter basis was attributable to the: (i) lower average selling price (ASP) and; (ii) marginal growth in production volume of about +1.0%qoq. The former was impacted by the: (i) heightening competition; (ii) weakening of USD and; (iii) cost savings pass through due to the lower average cost of natural rubber latex (-4.2%qoq) and nitrile latex (-14.3%qoq). Meanwhile, the later was caused by insignificant capacity increased during the quarter. Note that the first phase expansion of F32 factory (with production capacity of 2.2b pieces per annum) will begin production in the 2QCY19 instead of its original plan in the 1QCY19.

Committed to expand capacity. Management disclosed that they plan to add 9.6b and 10.8b pieces per annum in CY19 and CY20 respectively. This will result in an increase in production capacity by +33.7% to 80.9b pieces per annum by the end of CY20. Due to the aggressive expansion plan, we expect that the ASP will be trending downward further to maintain demand and supply equilibrium.

Impact to earnings. We revised our FY19F and FY20F downwards by -10.8% and -17.0% respectively driven by the expectation of further downward pressure in ASP.

Target price. We are revising our TP downwards to RM4.75 (previously RM5.75) per share. Our valuation is premised on FY20 EPS of 19.0sen pegged to an unchanged PER of 25x which is the company’s three-year historical average PER.

Source: MIDF Research - 25 Mar 2019