We came away from our recent company visit feeling more assured about the company’s prospects. We believe that Top Glove would report yet another record set of earnings in 1QFY16 on the back of higher sales volume and margin expansion. Maintain BUY with a higher TP of MYR11.61 (from MYR10.12, 20% upside).

Record quarter on the cards. We expect 1QFY16 (Aug) earnings to grow 7-10% QoQ on the back of higher sales volume and margin expansion. We forecast revenue for the quarter to grow 2-5% on the back of a better-than-expected increase in sales volume as well as stronger ASP assumptions. Management has guided that net margin for the quarter has improved QoQ due to better operating efficiency, a more favourable product mix, a 10.9% strengthening in USD/MYR, and a 12-14% decrease in raw material prices. We estimate that net margin will likely improve to 15.2% in 1QFY16 (4QFY15: 14.5%). Consequentially, we expect 1QFY16 earnings to be around MYR110m-115m (4QFY15: MYR103.1m), 15-20% higher than consensus estimate. Top Glove’s earnings results are expected to be released on 15 Dec 2015.

Hunt for growth. We revise our cost of equity to 8.3% (from 9%), as we believe that investors have accorded a higher scarcity premium to the rubber product sector. We opine that this is due to a dearth of robust earnings growth opportunities amidst a subdued macroeconomic environment (note that RHB’s 2016 Malaysia GDP forecast has been downgraded to 4.6% from 4.9%). As such, we believe that Top Glove (15.4% earnings CAGR over FY16-18) would stand out on the back of its attractive growth opportunities.

Maintain BUY. We raise our FY16-18 earnings forecasts by 10-12% after adjusting for better-than-expected sales volume, ASP as well as margin assumption. We continue to be impressed by Top Glove’s earnings resilience. Maintain BUY with a higher DCF-derived TP of MYR11.61 (20% upside, CoE: 8.3%, TG: 2%), with an implied FY16F P/E of 19.7x. We believe that Top Glove, which is currently trading at 16.5x FY16F P/E, would close the 23% valuation gap to the sector average of 20.2x. The key risk to our recommendation would be the de-rating of the sector driven by liquidity, should investors switch out of non-cyclical stocks on signs of abating market uncertainty.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Top Glove is the largest glove manufacturer in the world with an annual capacity of 44.6bn pieces.

Recommendation Chart

Source: RHB Research - 2 Dec 2015