Investment Highlights

• 3QFY19 earnings came in at RM74.7m (-29.4%qoq), lagged our and consensus estimates

• Earnings was dragged by the spike of in natural rubber latex price (+22.0%qoq)

• We expect a better performance in 4QFY19 as the higher cost is passed through to consumer

• First interim dividend declared of 3.5sen per share

• Maintain NEUTRAL with a revised TP of RM4.70

Lagged estimates. Top Glove’s 3QFY19 earnings came in at RM74.7m. This translates into a sequential earnings contraction of - 29.4%qoq. Cumulatively, this bring its 9MFY19 earnings to RM290.5m, which lagged our and consensus full-year FY19 earnings estimates at 60.0% and 63.0% respectively. The subdued performance for the quarter was mainly attributed to the surge in natural rubber latex price.

Earnings dragged by natural rubber glove segment. In the review quarter, natural rubber glove (NR) contributed approximately 40.0% of total revenue (vs 38.0% as of 2QFY19) thanks to a higher 3QFY19 sales volume recorded of about +9.2%qoq and the increased in average selling price (ASP) of NR by about +1.0%qoq. However, profit margin was eroded due to the abrupt upward movement in the natural rubber latex price by about +22.0%qoq to RM4.71/kg during the quarter. Due to the time lag of two to three months before the higher cost can be passed to consumers, profitability was adversely impacted by the mismatch between raw material cost and selling price.

Competitive environment for nitrile glove segment. Meanwhile, there was no time lag issue between ASP and raw material price for nitrile glove segment. Nonetheless, due to the increasing competition, 3QFY19 ASP and sales volume dropped by -3.0%qoq and -0.5%qoq respectively. Consequently, the nitrile glove’s contribution to total revenue dropped to 45.0% as of the 3QFY19 (vs 46.0% as of 2QFY19). However, the impact to bottom line was fairly muted due to the decrease in nitrile price by -4.6%qoq to USD1.04/kg from Feb to May 2019 as well as better efficiency from the new plants.

First interim dividend declared. The first single interim dividend for FY19 of 3.5sen per share was declared. This is the same quantum as per FY18.

Source: MIDF Research - 19 Jun 2019