Top Glove - Maybank Kim Eng 2018-09-07: Cautious On Impairment

SGinvestors.io

TOP GLOVE CORPORATION BHD SGX:BVA

Top Glove - Cautious On Impairment

Maintain HOLD

• Top Glove’s share price bottomed in Jul 2018 and has risen 20% since. However, share price may have a knee jerk reaction upon the release of its 4QFY18 results in Oct 2018 as we expect its earnings to be hit by a sizable impairment.
• Elsewhere, positive external factors bode well for its near- term earnings and its 1-for-1 bonus issuance is targeted to complete by Oct 2018.
• Maintain earnings forecasts, HOLD call and target price of MYR9.90 (26x 2019 PER; 20% discount to our target for Hartalega).

4QFY18E: Better core earnings, but weak headline

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• Top Glove’s 4QFY8/18 results will be released on 19 Oct and we expect a better q-o-q core earnings (3QFY18: MYR118m), underpinned by stronger sales volume, stable margins (USD/MYR: +3% q-o-q, latex: -10%, NBR: +10%) and full quarter earnings contribution from Aspion (only recognised 1.5 months earnings in 3QFY18). However, headline profit could be hit be by a sizable impairment, in relation to Top Glove’s overvaluation claim for the purchase of Aspion (total overvaluation claim amounts to MYR640m).

Positive external factors

• We think near-term earnings growth will continue to be supported by the stronger USD/MYR of 4.15 presently (4QFY18: average 4.05), benign latex prices of MYR4.05/kg presently (4QFY18: average MYR4.20/kg) and stable NBR price of USD1.34/kg presently (4QFY18: average USD1.33/kg).
• Additionally, demand for Malaysia’s rubber gloves remains robust (1Q18: +9% y-o-y) and the potential US import tariff of 10-25% on China’s gloves may lead to slightly better demand for Malaysia’s gloves. In 1Q18, Malaysia and China supplied 68% and 10% of US’s rubber glove demand.

Maintain earnings forecasts

• Our earnings forecasts have assumed for USD/MYR rate of 3.95 for FY18- 20E. Based on our sensitivity analysis, every 1% change in USD/MYR could change our EPS estimates by 4%.
• Meanwhile, Top Glove is working on initiating the arbitration process but a conclusion could be long drawn.
• We have assumed that Top Glove will be recognising the actual earnings from Aspion, rather than the profit guarantee in our FY18-20E EPS.

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 Research | https://www.maybank-ke.com.sg/ 2018-09-07

SGX Stock Analyst Report HOLD Maintain HOLD 9.90 Down 12.900