Top Glove (TOPG MK) - Maybank Kim Eng 2018-06-19: Room For Further Re-rating

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TOP GLOVE CORPORATION BHD SGX: BVA

Top Glove (TOPG MK) - Room For Further Re-rating

Ascribing 2019 PER target of 30x; Upgrade to BUY

• Consolidation of Aspion’s earnings would lift Top Glove’s upcoming 3QFY8/18 earnings and its earnings base may surpass that of Hartalega in 4QFY18.
• Our Target Price is raised to MYR12.90 (+30%) as we ascribe a higher PER target of 30x (from 24x) on an unchanged 2019 EPS, being a 10% discount to the sector’s average.
• Its valuation gap against Hartalega could narrow on its superior earnings growth, rising EBITDA margin and ROE, and 1-for-1 bonus issue (to go ex- in 3Q18).

3QFY18: Aspion to lift earnings

• Top Glove's 3QFY18 results will be released on 19th Jun and we expect stronger earnings (2QFY18: MYR109m net profit) on:
  1. Aspion to contribute 1.5 months earnings in 3QFY18, potentially lifting Top Glove’s earnings by c.6%;
  2. slightly higher sales volume with its plant running at a higher utilisation rate of c.92% (2QFY18: 90%); but
  3. margins (ex-Aspion) could be just slightly dented by the weaker USD/MYR (-2% q-o-q).
• Also, the lower latex cost (-7% q-o-q; c.30% of production cost) may offset the higher NBR cost (+11% q-o-q; c.20% of production cost).

Driving Aspion’s earnings ahead

• We expect sequential earnings growth to be supported by its new factory F31, which will commercialise in Jun 2018 (+5% to total capacity of 60.5b pcs p.a.). Additionally, we believe Aspion could see stronger earnings growth ahead as Top Glove taps its own sales network to drive Aspion’s sales.
• Presently, Aspion’s EBITDA margin is already c.4-ppt higher than that of Top Glove’s and higher plant utilisation rate ahead (70% now) could further enhance Top Glove’s overall margins.

Superior earnings growth and rising margins

• We project strong double-digit EPS growth of 35% and 18% in FY18-19 respectively, underpinned by contribution from Aspion and sales volume growth (ex-Aspion) of 18%/12% in FY18-19 and higher overall EBITDA margin (+2.3-ppt from FY17) on a higher operating leverage and Aspion’s superior margin.

Lee Yen Ling Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-06-19

SGX Stock Analyst Report BUY Upgrade HOLD 12.90 Up 9.850