KEY INVESTMENT HIGHLIGHTS

• 4QFY19 earnings came in at RM80.1m (+7.2%qoq) in view of higher sales volume of nitrile gloves

• However, lower contribution from the natural rubber gloves partially subdued the earnings growth

• All in, FY19 earnings performance lagged ours and consensus estimates

• Final dividend declared of 4.0sen per share, leading to cumulative FY19 dividend of 7.5sen

• Maintain NEUTRAL with a revised TP of RM4.58

Lagged estimates. Top Glove’s 4QFY19 earnings came in at RM80.1m. This translates into a sequential earnings expansion of +7.2%qoq. Cumulatively, this bring its full year FY19 earnings to RM370.6m, which lagged our and consensus full-year FY19 earnings estimates at 89.3% and 90.8% respectively. This was mainly due to the lower than expected sales volume for natural rubber gloves.

Declined in sales volume of natural rubber gloves. The sales volume for natural rubber gloves declined sequentially in the quarter under review. This is in contrast to the previous quarter where sales volume rose by +9.2%qoq. Fortunately, the decline was mitigated by higher sales volume of nitrile glove resulting in a marginal decline in quarterly revenue by -0.1%qoq. Note that despite nitrile glove historical contribution of about 45.0% to total revenue, the higher sales volume failed to lift overall revenue due to the subdued selling price. Notwithstanding that trend, 4QFY19 earnings improved on quarter-onquarter basis thanks to the relatively stable nitrile latex prices (slight increase of +1.0%qoq).

Prospect. Prospects for the rubber glove manufacturing sector remain strong with increasing demand arising from switching trends towards nitrile glove. In response to this, Top Glove is expected to add more than 14.2b pieces of nitrile glove production capacity per annum by the end of CY20. Post completion of the expansion plan, the group will become the largest manufacturer of nitrile glove with total production capacity of more than 30.0b pieces per annum (out of its total capacity per annum of 84.1b). Nonetheless, we view that the aggressive expansion in production capacity will lead to downward pricing pressure.

Final dividend declared. The final dividend for FY19 of 4.0sen per share was declared. This brings the cumulative dividend to 7.5sen per share for FY19 (vs FY18 of 8.0sen per share).

Impact to earnings. We revised our FY20F downwards by -2.7%yoy as we take into account the slower sales volume for natural rubber glove. The slower sale in natural rubber glove is expected to be partially mitigated by the lower rubber latex price which has eased by -12.0%qoq to about RM4.40/kg.

Target price. We tweaked our TP downward to RM4.58 (previously RM4.70) per share. Our valuation is premised on FY20 EPS of 18.3sen pegged to an unchanged PER of 25x which is the company’s three-year historical average PER.

Maintain NEUTRAL. We view that the group’s outlook will continue to be underpinned by stable and steady growth in demand of disposable medical glove as health regulations become more stringent. In addition, we expect finance cost to remain elevated as the expansion will be funded via borrowings. That said, we believe that the diversity of its existing product range as well as Top Glove’s position as the world’s largest glove manufacturer serves as a competitive advantage over other major glove manufacturers. Nonetheless, we believe the positivity has been priced in at current valuation. Coupled with an unattractive dividend yield of +1.9%, the upside is limited compared to its smaller peers. All factors considered, we maintain our NEUTRAL recommendation on the stock.

Source: MIDF Research - 27 Sept 2019