Top Glove Corporation - CIMB Research 2018-03-15: Tightening Its Grip

Top Glove Corporation - CIMB Research 2018-03-15: Tightening Its Grip TOP GLOVE CORPORATION BHD BVA.SI

Top Glove Corporation - Tightening Its Grip

  • We deem Top Glove's 1HFY8/18 core net profit of RM210.1m to be above expectations, at 50.3% of our FY18F estimates. This is on the back of expectations of a stronger 2HFY18.
  • The 34.3% y-o-y growth in 1HFY18 core net profit was due to:
    1. increase in glove sales,
    2. higher selling prices (ASPs), and
    3. lower raw material prices, mainly latex.
  • Despite a weaker US$/RM, TOPG should record sequentially-stronger earnings, with contributions from Aspion beginning 3QFY18 and global glove demand staying robust.
  • We raise our FY18-20F EPS by 5.7-7.9% to account for:
    1. lower latex prices,
    2. higher sales volume, and
    3. increase in ASPs.
  • Maintain ADD, with a higher Target Price of RM10.80 (22.6x CY19F P/E, a 20% discount to Hartalega’s target P/E).



Sequentially-stronger 2QFY18 

  • Top Glove's 2QFY8/18 revenue rose 2.2% q-o-q, mainly due to a ~4% q-o-q increase in selling prices (ASPs) and higher sales volume (+3% q-o-q). Despite the ringgit strengthening vs. US$ (+5.5% q-o-q), 2QFY18 EBITDA margins improved to 16.3% (+0.7% pts q-o-q), while core net profit rose to RM109m (+7.9% q-o-q). 
  • We attribute the strong performance to:
    1. decline in latex prices,
    2. greater economies of scale, and
    3. strong global demand, allowing TOPG to raise ASPs. 
  • Also, TOPG recorded a lower tax rate of 11.7% (-1.5% pts q-o-q).


1HFY18 core net profit beat expectations 

  • As 2QFY18 results were stronger-than-expected, 1HFY18 core net profit of RM210.1m was above expectations, at 50.3% our and 48.9% of consensus’ FY18F estimates. The 34.3% y-o-y growth in core net profit was mainly driven by:
    1. higher glove sales,
    2. increase in ASPs,
    3. greater economies of scale and
    4. decline in raw material prices.
  • Accordingly, 1HFY18 EBITDA margins expanded to 15.9% (+1.3% pts y-o-y), also driven by better cost efficiencies.


Higher ASPs and lower latex prices offset weaker US$/RM 

  • While demand for rubber gloves remains strong due to lower vinyl glove supply, we opine that TOPG has been able to raise its ASPs to pass on any cost increases (gas, worker levy and etc.) as well as the impact of a weaker US$ vs ringgit (-5.3% q-o-q) in 1HFY18.
  • TOPG has also benefitted from the recent decline in latex prices (-7.1% q-o-q). Hence, we believe TOPG should be able to maintain its current margins moving forward, given that the current supply-demand dynamics are still in favour of glove makers.


Expecting a stronger 2HFY18F; raise FY18-20F EPS by 5.7-7.9% 

  • Moving forward, we expect TOPG to record sequentially-stronger quarters ahead. In 2HFY18, earnings should be boosted by more capacity coming on-stream, from its new F30 plant (began in Aug 17) and a new 3bn units capacity plant that will begin operations in Jun 18. Also, contributions from Aspion should also be reflected in TOPG’s earnings starting 3QFY18. 
  • Our FY18-20F EPS is raised by 5.7-7.9% to account for:
    1. lower latex prices,
    2. higher sales volume, and
    3. increase in ASPs.


Maintain ADD with higher Target Price of RM10.80 

  • Maintain ADD, with a higher Target Price of RM10.80. This is still based on an unchanged 22.6x CY19F P/E (a 20% discount to our target P/E of 28x for Hartalega). 
  • We continue to like TOPG for:
    1. being a key beneficiary of the strong demand for rubber gloves as the world’s largest glove producer,
    2. margin expansion from increasing economies of scale, and
    3. its growing manufacturing capabilities. 
  • Downside risks are stiffer-than-expected pricing competition, and sharp weakening of US$/RM.




Walter AW CIMB Research | http://research.itradecimb.com/ 2018-03-15
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 10.80 Up 10



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