Top Glove Corporation - CIMB Research 2017-12-19: Still The Top Gun

Top Glove Corporation - CIMB Research 2017-12-19: Still The Top Gun TOP GLOVE CORPORATION BHD BVA.SI

Top Glove Corporation - Still The Top Gun

  • Top Glove (TOPG)’s 1QFY8/18 core net profit of RM101m was above expectations, at 26% of our and consensus’ FY18 estimates.
  • While revenue rose 19.4% y-o-y, 1QFY18 core net profit grew 37.7% y-o-y due to:
    1. higher sales volume,
    2. better cost efficiencies, and
    3. greater economies of scale.
  • TOPG is confident of raising its ASPs further to pass on the impact of the stronger ringgit vs. US$, as well as the upcoming increase in gas prices effective 1 Jan 2018.
  • The acquisition of Aspion Sdn Bhd for RM1.3bn-1.4bn should be completed by Feb 2018, and turn TOPG into the world’s largest surgical glove producer by capacity.
  • Maintain ADD, with a higher Target Price of RM7.92, based on 21x CY19 P/E (from 19x).

1QFY18 net profit above expectations 

  • TOPG 1QFY18 revenue grew 19.4% y-o-y, thanks to an increase in average selling prices (ASPs) (~2.0% y-o-y) from higher raw material prices (latex: 12.1% y-o-y & nitrile latex: 3.0% y-o-y) as well as a 17% y-o-y growth in sales volume. 
  • 1QFY18 EBITDA margins also improved 1.3% pts y-o-y to 15.6%, driven by greater economies of scale. Accordingly, 1QFY18 core net profit rose to RM101m (37.7% y-o-y) after accounting for one-off land sale of RM4.4m. This was above expectations, at 26% of both our and consensus’ FY18 estimates.

Sequential stronger quarters ahead 

  • Moving forward, TOPG should record sequentially stronger quarters. Our view is based on the current strong demand for rubber gloves, given the lower supply of vinyl gloves, due to the closure of several vinyl glove plants in China owing to pollution issues. The shortage is expected to persist for another 6-9 months. 
  • Also, earnings should be boosted by more capacity coming on-stream, as production is ramped up from its new F30 plant (began in Aug 17) and a new 3bn unit capacity plant that will begin operations in May 18.

Potential increase in ASPs should not be an issue 

  • As current supportive supply-demand dynamics are in favour of glove manufacturers due to the lower vinyl glove supply, we believe TOPG should have no problems raising its ASPs beyond current levels to pass on the upcoming average increase of 22.9% in natural gas prices effective 1 Jan 2018 and the impact of a stronger ringgit vs. US$.
  • Hence, any ASP increases are unlikely to have a major impact on demand as the industry’s cost pass-through mechanism remains intact, with a short lag of 2-3 months.

Acquisition of Aspion is positive on all fronts

  • TOPG recently stated that it has signed a term sheet to acquire a 100% stake in Aspion Sdn Bhd for an estimated RM1.3-1.4bn that is due for completion by Feb-2018. We are positive on this potential acquisition given:
    1. its earnings-accretive nature (may raise our FY18-20F EPS by 3.9-13.6%),
    2. the potential synergies between both companies, and 
    3. Aspion adding to TOPG’s manufacturing capabilities. 
  • Note that, we have yet to include any potential EPS upside from this acquisition pending the completion of the deal.

Maintain ADD with higher Target Price of RM7.92 

  • We raise our FY18-20F EPS by 3.6-4.0% to account for higher sales volume and increase in ASPs. Accordingly, our Target Price is raised to RM7.92 based on a higher P/E of 21x (from 19x), in line with +1 s.d. of its 3-year historical mean. 
  • In our view, TOPG should trade higher given:
    1. it is a key beneficiary of strong demand for rubber gloves as the world’s largest glove producer,
    2. margin expansion from increasing economies of scale, and
    3. growing manufacturing capabilities. 
  • Downside risks: stronger pricing competition and sharp decline in US$/RM.

Walter AW CIMB Research | http://research.itradecimb.com/ 2017-12-19
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 7.92 Up 6.900