Top  Glove’s  1HFY15  results  came  in  stronger  than  our/consensus estimates at 56%/53% respectively. We upgrade our recommendation to NEUTRAL  with  a  revised  TP  of  MYR5.47  (from  MYR4.04),  5%  upside, based  on  15x  CY16  P/E.  The  better  results  were  led  by  higher  overall sales volume, improved operating efficiency, a stronger USD and lower raw material prices.   

Results  review.  Top  Glove’s 1HFY15  (Aug)  earnings  (+14.1%  YoY) beat  expectations,  driven  by  higher  overall  sales  volume  (notably  from Japan),  increased  operating  efficiency,  a  stronger  USD  and  lower  raw material prices. Its China operation also performed better, turning around in 1HFY15 to record a MYR3m profit vs MYR10.6m losses in 1HFY14.

Margin  improvement.  1HFY15  EBIT  margin  improved  YoY  to  10.8% from  9.2%,  primarily  attributed  to  more  efficient  machines  in  its  new factories,  ongoing  operation  automation,  more  rigorous  cost  control measures, as well as favourable macroeconomic conditions.

Capacity expansion.  Factory 29 came online in Jan 2015, adding 2bn capacity  to bring total capacity to  44.6bn  pieces.  Top Glove  expects  to add 1.4bn capacity of latex gloves and 6.2bn capacity of nitrile gloves to bring total capacity to 52.2bn pieces by Sep 2016.  

Forecasts and risks. We upgrade our earnings forecasts by 11-15% for FY15-17 to reflect its improved performance. Key risks include delays in capacity expansion plans.

Investment  case.  The  earnings  improvement  –  from  better  operating efficiency and favourable macroeconomic conditions – was stronger than expected, as we had initially anticipated tepid earnings growth. Thus, we upgrade our call to NEUTRAL (from Sell) with a revised TP of MYR5.47 (from  MYR4.04),  implying  a  5%  upside.  Nevertheless,  Top  Glove  still trails  its  peers  Hartalega  (HART  MK,  BUY,  TP:  MYR8.60)  and  Kossan ubber  Industries  (Kossan)  (KRI  MK,  BUY,  TP:  MYR6.06)  in  terms  of capacity expansion, specifically in the more lucrative nitrile segment.  As such,  we  peg  Top  Glove  to  15x  CY16  P/E,  which  is  0.5SD  below  its historical trading band (from -1.5SD previously), vs Hartalega’s 21x and Kossan’s 17x, and we believe Top Glove may continue to underperform its  peers  (see  Figure  4).  Given  an  expected  FY15-17F  EPS  CAGR  of only  9%,  we  feel  that  Top  Glove  is  currently  trading  at  generous valuations for CY16F at 14.2x, which reaffirms our NEUTRAL call. 

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Top  Glove  Corporation  is  an  investment  holding  company.  The  principal  activities  of  its  subsidiaries  are  manufacturing  and  sale  of medical gloves. 

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Source: RHB