Top Glove (TOPG MK) - Maybank Kim Eng 2018-03-14: Unperturbed By Weaker USD

Top Glove (TOPG MK) - Maybank Kim Eng 2018-03-14: Unperturbed By Weaker USD TOP GLOVE CORPORATION BHD BVA.SI

Top Glove (TOPG MK) - Unperturbed By Weaker USD

Maintain HOLD 

  • Upcoming 2QFY8/18 earnings could be flattish q-o-q and within expectations. We think organic volume growth ahead could be slower as China resumes production gradually and Malaysian players expand capacity. However, earnings growth could accelerate from 4QFY18 with contribution from Aspion. 
  • We maintain our EPS forecasts, HOLD call and Target Price of MYR9.85 (2019 24x PER; +2SD). Trading at 12M forward PER of 25x, we think current valuation has already priced in all the positives.

2QFY18: Expect flattish quarter 

  • 2QFY18 results is scheduled to be released on 15 Mar and we expect earnings to be flattish q-o-q (1QFY18: MYR105m net profit). 
  • Despite the lower USD/MYR (-5% q-o-q) impacting revenue receipts and higher costs (i.e. gas tariff hike and foreign worker levy), earnings could be cushioned by a higher sales volume (c.+5% q-o-q) and the upward adjustment in ASPs. ASPs of latex gloves were raised by 6% in Dec 2018 while ASPs of nitrile remain unchanged.

Aspion to contribute from Apr 2018 

  • The EGM, which took place last Thursday, went through smoothly with shareholders holding 100% of total shares voted in favour of Top Glove’s acquisition of Aspion (a surgical glove specialist) for a purchase consideration of MYR1.37b, with 90% of the amount (or MYR1.23b) to be paid in cash and the balance (or MYR137m) to be paid in 21m new Top Glove shares. The deal could be completed in early-Apr (slightly ahead of its initial target of mid-Apr). 
  • We have incorporated for Aspion’s earnings from May 2018 in our FY18-20F earnings forecasts.

Slower volume growth ahead? 

  • Top Glove’s higher sales volume in FY17-1HFY18 could be partially due to the production cut in China and shortage of gas supply during the winter months. We think its sales volume might see slower growth ahead as China gradually resumes production and Malaysia expands capacity. 
  • The sales lead time for its latex and vinyl gloves remain high at 60 days. However, the sales lead time for its nitrile glove has already shortened to 30-45 days (from 60 days in 2HCY17), potentially due to the recent new supply in the market.

Lee Yen Ling Maybank Kim Eng | 2018-03-14
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 9.850 Same 9.850