Top Glove (TOPG MK) - UOB Kay Hian 2018-10-12: 4QFY18 Weaker-Than-Expected Earnings; Priced To Perfection


Top Glove (TOPG MK) - 4QFY18: Weaker-Than-Expected Earnings; Priced To Perfection

  • Top Glove’s 4QFY18 core earnings decelerated 9% q-o-q, mainly due to higher raw material, interest and tax costs. Also, forward orders remained softer than 10 months ago.
  • We stay bearish on the stock as valuations are rich and risk-reward profile is unfavourable.
  • Within our coverage, Top Glove is the second priciest proxy to the sector. Also, it is trading at more than +2SD its five-year forward PE.
  • Maintain SELL and target price of RM8.20.


Weaker than expected.

  • Top Glove’s 4QFY18 core earnings fell 9% q-o-q (but up 26% y-o-y) vs our earlier expectation of a q-o-q improvement. This brought FY18 bottom-line to RM448m (+39% y-o-y), which was at the lower end of our expectations, making up 96% and 100% of our and the street’s full-year forecasts respectively.
  • A final DPS of RM0.10 (+18% y-o-y) was declared, lifting total payout in FY18 to RM0.17 (+17% y-o-y).

Good increase in sales.

  • The company registered a good quarterly revenue growth of 11% q-o-q in 4QFY18. This was lifted by better volumes (+6% q-o-q on encouraging demand from emerging countries), positive ASP revision (+1% q-o-q due to cost pass-through to customers) and forex tailwinds (+3% q-o-q as the US dollar strengthened against the ringgit).

Dragged by higher raw material, interest and tax costs.

  • Despite the positive top-line growth, 4QFY18 core earnings (ex net forex losses) fell 9% q-o-q. This was due to:
    1. higher raw material prices (inched up at a quicker 3% q-o-q vs the 1% q-o-q rise in ASP);
    2. 45% q-o-q jump in interest expense; and
    3. elevated effective tax rate of 28% vs 11% in 3QFY18.
  • That said, robust capacity utilisation (~90%) and tight cost control helped prevent bottom line from declining at a faster clip.

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Unveiling new expansion plans.

  • With the acquisition of Aspion completed in early-April along with the completion of Factory 31 in July, Top Glove is now capable of producing up to 60.5b gloves per year.
  • Also, management unveiled its new expansion plans (Factory 33, 5A and 8A) on top of the outstanding expansion timeline for Factory 32 (by end-19). When all are fully operational by 2020, Top Glove’s manufacturing capacity will balloon to 70.3b gloves annually (+16%). The new lines are for nitrile gloves, which should raise capacity mix in this space to about 40% from 35% currently.
  • Management intends to achieve a 50:50 nitrile-to-latex glove production split over the longer term.

Rising threat of demand tapering?

  • Management shared it is still seeing only 40-45 days of forward orders, shorter than Dec 17's level of 50-60 days. Generally, we remain concerned about:
    1. rising competition where more nitrile glove supply capacity will be coming on- stream in the medium term; and
    2. the vinyl glove undersupply in China is easing with capacities restarting after 2017's environmental clampdown, prompting price-sensitive F&B customers to switch back to more economical glove offerings.


  • We introduce FY21 earnings estimates but make no changes to our FY19-20 forecasts.
  • Key upside risks include:
    1. recovering the RM640m from Adventa Capital,
    2. market share gains,
    3. more bona fide sizeable value-accretive M&As, and
    4. US dollar appreciating markedly vs the ringgit.


  • Maintain SELL and target price of RM8.20, based on 18x 2019F PE, or +0.5SD above its 5-year forward mean PE of 16x but below the sector's 27x. The premium is fair as:
    1. Top Glove has been making steady headway into the generally faster-growing nitrile glove space; and
    2. despite the negative development at Aspion, the group is still touted as the no.1 surgical glove player globally.
  • That said, the discount to the glove sector is warranted, considering its relatively stretched balance sheet (net gearing of 0.9x vs peers' average of 0.1x).
  • Post-bonus issue, our target price is RM4.10, excluding the potential dilution from full guaranteed exchangeable bonds conversion into new Top Glove shares pending more details of the exercise.


  • Supply-demand imbalance structurally driving up ASP.
  • More meaningful bona fide M&As contributing to higher inorganic growth.
  • Innovative product offerings to disrupt the marketplace.

Chan Jit Hoong CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-12
SGX Stock Analyst Report SELL MAINTAIN SELL 8.200 SAME 8.200