Top Glove Corporation - DBS Research 2018-10-12: Earnings Within Expectations

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove Corporation - Earnings Within Expectations

FY18 earnings came in line with expectations.
No impairment was made for the provisional goodwill arising from Aspion’s acquisition.
Litigation against Adventa Capital Pte Ltd is ongoing.
Maintain FULLY VALUED and Target Price of RM6.46.

Top Glove booked a net profit of RM101.6m in 4QFY18 (+3.0% y-o-y; -13.6% q-o-q). This brings FY18 earnings to RM433.6m, which met expectations at 97%/98% of our/consensus forecast. Top-line was supported by higher volume sold but bottom-line was hit by higher taxes.

No impairment was made for the provisional goodwill arising from the acquisition of Aspion (RM1.16bn). This is based on the impairment test that was undertaken by Top Glove. The impairment test assessed the recoverable amount of Aspion based on its value-in-use which in turn is determined by the cash flow of Aspion.
Top Glove also announced a final single-tier interim DPS of 10 sen. This brings FY18 dividend to 17 sen, which is in line with our estimates.

Top Glove’s 4QFY18 revenue came in at RM1,216.9m (+34.8% y-o-y; +10.6% q-o-q), in line with higher sales volume (+26.0% y-o-y; +5.4% q-o-q).
ASP rose 1.2% q-o-q as the company adjusted its prices for higher nitrile prices. The average natural rubber latex price came down to RM4.26/kg (-21.7% y-o-y; -2.7% q- o-q) while that for nitrile latex came in at US$1.26/kg (- 10.5% y-o-y; +13.9% q-o-q).
The higher nitrile price was partly offset by the strengthening of the USD at RM4.06/USD (-5.1% y-o-y; +3.6% q-o-q).
EBIT/k gloves came in at RM11.79 (+28.7% y-o-y; +4.6% q-o-q). Improvements were backed by better efficiency arising from internal improvements as well as the reduction in manpower requirements.

~ SGinvestors.io ~ Where SG investors share

Top Glove currently operates 32 glove factories with the capacity to produce 60.5bn gloves p.a., including the latest acquisition of Aspion. It is currently working on expanding Factory 32 in Klang (to commence in early 2019), Factory 33 (early 2019) and F5A (end-2019).
Meanwhile, its newest factory F8A in Thailand will be operational by 2020. Together, these expansion projects, involving more than 98 production lines, will raise the group’s annual capacity to 69.1bn gloves (+14.2%).
Premised on the expected completion dates provided by management, we expect Top Glove to grow its effective annual capacity by 7%/10%/9% in FY18/19/20F.

The material litigation against Adventa Capital Pte Ltd is still ongoing. Top Glove has filed a new Mareva Injunction at the KL High Court which is fixed for hearing on 29 Oct.
Following the EGM on Wednesday, shareholders have approved the resolution of removing Low Chin Guan, director of Top Glove with immediate effect. Recall that Low was appointed the director of Top Glove following the acquisition of Aspion in April.

The shareholders have also approved a one-for- one bonus share issue which will add 1.2bn new ordinary shares in the company.

We maintain our FULLY VALUED call with a Target Price of RM6.46.
Our Target Price is based on a 16x CY19 EPS which is equivalent to its 5-year mean PE. This is in view of its weaker earnings growth prospects that can no longer justify a premium valuation.

Siti Ruzanna Mohd Faruk DBS Group Research | https://www.dbsvickers.com/ 2018-10-12

SGX Stock Analyst Report FULLY VALUED MAINTAIN FULLY VALUED 6.460 SAME 6.460