Review

• Top Glove’s 1QFY17 core earnings of RM69.3mn (+19.9% QoQ, -46.4% YoY) was within ours but below consensus estimates at 21.6% and 19.6% respectively. Similar to 1QFY16, no dividends were declared.

• YoY, despite sales volume growth of 7.0%, revenue declined by 1.8% to RM785.6mn due to the decline in average selling prices (ASPs) in USD by 6.0%. Meanwhile, the 46.4% YoY plunge in earnings was primarily due to high base effects of 1QFY16, which was marked by favourable tailwinds from the stronger USD against the Ringgit, subdued raw material prices as well as the absence of competitive price pressures.

• QoQ, demonstrating improved ability to pass through cost increases, ASPs in USD improved by 1.0%. Revenue increased by 8.8% QoQ to RM785.6mn mainly on sales volume growth of 5.0%. At the bottom line, adjusted PBT margins improved by 1.5%-points QoQ to 10.9%, thanks to the strengthening of the USD against the Ringgit by 4.2% QoQ, albeit partly offset by the full quarter impact of the 11.1% minimum wage and 6.0% natural gas hike in July 2016.

Impact

• Make no changes to our estimates.

Outlook

• Looking ahead, aside from riding through the competitive operating environment, challenges for the group stem from managing fluctuations in foreign exchange and raw material prices. In 2HCY16, both the USD/Ringgit and natural latex have been trending upwards, respectively increasing by circa 11.7% and 44.0%.

• Meanwhile, on the expansion front, the group’s remains undettered to continuously expand to tap on the sustained growth in demand for rubber gloves from the healthcare sector and at the same time extend its market leadership. By 2018, capacity is expected to reach 56.8bn gloves/annum, a 21.9% increase from its latest capacity of 46.6bn gloves/annum.

Valuation & Recommendation

• Our TP for Top Glove is maintained at RM4.90/share based on an unchanged PER of 18.0x. At this juncture, the stock is trading at a PER of 19.0x, close to 1 S.D. above its historical 5-year average PER of 15.9x and hence, we reiterate our Sell recommendation on the stock.

Source: TA Research - 16 Dec 2016