Period

2Q16/1H16

Actual vs. Expectations

1H16 PATAMI of RM232.9m (+122% y-o-y) came in within our expectation at 55% of our full-year forecast. However, the 1H16 results came in above market consensus at 58%.

Dividends

No dividend was declared for the quarter which is within expectations. Key Result

Highlights

QoQ, the 2Q16 register revenue fell 13.3% to RM693.9m due to lower volume sales (-3%) and lower ASPs (-11%). Specifically, latex powdered and nitrile volume fell 3% but latex powder free rose 3%. Similarly, 2Q16 PBT fell 18% mainly attributed to the lower volume sales, weakening of USD against RM by 1% as well as intense competition in the nitrile glove segment coupled with higher natural-gas price, which came into effect on 1 Jan 2016 (+17% QoQ). Despite the slightly unfavourable external factors, PBT margin decline marginally 1%-pts from 20% in 1Q16 to 19% in 2Q16. Correspondingly, 2Q16 PATAMI fell 18% to RM104.6m.

YoY, 1H16 revenue rose 31% boosted by higher sales volume (+16%), strengthening of USD against MYR (average +25%), and benefited from lower raw material prices (-7% to USD0.96/kg for nitrile compared with 1HFY15). Note that nitrile sales volumes rose 51% and accounts for 32% of the product mix. PBT and PATAMI rose by 128% and 122% to RM293m and RM233m, respectively mainly attributed to the lower average nitrile price and a stronger USD, as well as its automation initiatives, which are bearing fruits now.

Outlook

Top Glove has plans to raise production capacity by additional 7.8bn pieces of gloves to 52.4b (+17%) by end Feb 2017. The two plants; namely F27 (Lukut, Port Dickson expected commercial production by end March 2016) and F30-Klang (commercial production by Feb 2017)), will focus on producing 2.0b and 4.4b pieces of nitrile gloves, respectively. F6 plant (in Phuket, Thailand targeted commercial production by Aug 2016) will cater for the production of latex gloves (1.4b pieces).

Change to Forecasts

No changes to our FY16 and FY17 earnings forecasts.

Rating & Valuation

Our Target Price is RM7.80 based on unchanged 22x FY17E EPS (+1.5 SD above 5-year historical mean of 17x). Top Glove’s historical valuation at peak earnings averaged at between 23-27x PER. The PER valuation of Top Glove (14.7x FY17E PER) has lagged behind Hartalega (26.7x CY17 PER). We consider the underperformance as unwarranted. The valuation gap should narrow when we consider that Top Glove has higher total capacity and net profit compared to Hartalega. We like Top Glove for: (i) its ability to evolve from purely a dominant latex-based rubber gloves producer into a higher margin nitrile-based products producer, (ii) undemanding PER valuation at discount to peers, and (iii) solid management.

Risks to Our Call

Lower-than-expected volume sales.

Source: Kenanga Research - 17 Mar 2016