Top Glove (TOPG MK) - Maybank Kim Eng 2018-06-20: Solid Global Demand Growth

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TOP GLOVE CORPORATION BHD SGX: BVA

Top Glove (TOPG MK) - Solid Global Demand Growth

Maintain BUY

• Top Glove's stronger 3QFY8/18 earnings were within expectations, driven by strong demand growth (9MFY18 sales volume: +23% y-o-y) from the emerging markets.
• We maintain our earnings forecasts, expecting a stronger 4QFY18 given the recent USD/MYR strength.
• Maintain BUY and Target Price of MYR12.90 (30x 2019 PER, 10% discount to our target PER for Hartalega).
• Key downside risk lies in Aspion’s earnings delivery.

Results in-line

• Top Glove's 3QFY18 core net profit of MYR118m (+8% q-o-q, +51% y-o-y) brought 9MFY18 core net profit to MYR327m (+40% y-o-y), making up 73% and 74% of our and street’s full-year estimates.
• A first interim DPS of 7sen was declared (9MFY17: 6sen), also within expectation.

3QFY18: Lifted by higher volume and Aspion

• Key takeaways from 3QFY18 results:
  1. Earnings was driven by organic growth with its net profit (ex-Aspion) at MYR124m (+13% q-o-q, +59% y-o-y) on strong volume growth (+4% q-o-q, +31% y-o-y). Additionally, margin also improved due to a better operational leverage on higher plant utilisation rate of c.92% (2QFY18: 90%);
  2. Aspion contributed 2-months net profit of MYR7m (5% of Group’s net profit);
  3. net gearing jumped to 72% as at end-May 2018 (post-acquisition of Aspion) from 13% end-Feb 2018.

Maintain earnings forecasts

• Top Glove’s 9MFY18 sales volume jumped 23% y-o-y (ex-Aspion) and we think it could sustain as the demand was driven by increasing awareness in the emerging markets. Key downside risk to our earnings forecasts lies in Aspion’s earnings delivery.
• To recap, there is a profit guarantee of MYR81m for FY10/18 but the latest earnings contribution from Aspion suggest a potential shortfall of c.MYR40m. However, Top Glove believes it can improve Aspion’s earnings performance by tackling the procurement and sales distribution from Jul 2018 onwards.

Swing Factors

Upside

• Changes in lenient regulatory requirements in developing markets which could accelerate global glove-demand growth.
• Sharp fall in rubber prices.
• Substantial rise in USD/MYR.

Downside

• Sharp fall in USD/MYR.
• Substantial rise in rubber prices.
• Undisciplined capacity expansion by industry players may lead to intense competition.

Lee Yen Ling Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-06-20

SGX Stock Analyst Report BUY Maintain BUY 12.90 Same 12.90