Top Glove - DBS Research 2018-12-18: Steady Start To FY19

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Steady Start To FY19

Top Glove's 1QFY19 earnings in line with expectations.
Revenue rose on higher volumes; EBIT/k gloves up y-o-y from better efficiency.
Expect upcoming quarters to be better from additional capacity; wary on Aspion and incoming capacity in the industry.
Maintain FULLY VALUED with Target Price RM4.64; valuations expensive.

(Using the FX rate of RM 1 to SGD 0.3823 as of 18-Dec, we derived the target price of 1.77 in SGD term)

Top Glove booked a net profit of RM110.1m in 1QFY19 (+4.4% y-o-y; +8.3 % q-o-q). This formed 22%/21% of ours/consensus forecasts. We deem this in-line as the group has incoming capacity as part of its expansion plans.
Bottom line was hit by higher tax due to a deferred tax liabilities provision of RM5.7m. However, the group has unutilised tax allowance of up to RM99m which it can choose to use in the coming quarters.

Top Glove's 1QFY19 revenue came in at RM1,262.0m (+34.7% y-o-y; +3.7% q-o-q), lifted by higher sales volume (+19.0% y-o-y; +0.6% q-o-q). ASP rose 14.4% y-o-y and 0.6% q-o-q as the company adjusted its prices for higher nitrile prices.
The average nitrile latex price came in at US$1.26/kg (+23.3% y-o-y; +2.1% q-o-q) during the quarter. The higher nitrile price was partly offset by the strengthening of the USD at RM4.16/USD (-1.2% y-o-y; +2.5% q-o-q), coupled with lower natural rubber latex of RM3.78/kg (-24.4% y-o-y; -11.3% q-o-q).
EBIT/k gloves came in at RM11.63 (+10.5% y-o-y; -1.4% q-o-q). Improvements were backed by better efficiency arising from internal improvements as well as the reduction in manpower requirements. However, the lower q-o-q numbers were due to lower contribution from its vinyl segment. We suspect this could be from supply coming back online from China as factories reopen after achieving compliance with better environmental standards.

Top Glove currently operates 32 glove factories with the capacity to produce 60.5bn gloves p.a. It is currently working on expanding multiple factories in Malaysia, Thailand and Vietnam.
In the near term, expansion will come from 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 148 production lines, will raise the group’s annual capacity to 75.3bn gloves (+24.5%).
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.

We are wary on the Aspion operations as it was loss making during the quarter at c.RM3m. We believe Top Glove will be able to leverage on its expertise to ramp up Aspion; however this may take time – it may take at least 4 years to achieve the targeted contributions of RM80m.
Continued losses may drag Top Glove’s profitability.

We maintain our FULLY VALUED call with a Target Price of RM4.64. Our Target Price is based on a 23x CY19 EPS which is equivalent to its +1SD of its 5-year mean PE.
We believe earnings will continue to be supported by capacity expansion, but its current valuation of 29.6x FY19 EPS is expensive as there are still headwinds from high nitrile prices, upgrading Aspion as well as incoming capacity by the entire industry in the medium term.

Siti Ruzanna Mohd Faruk DBS Group Research | https://www.dbsvickers.com/ 2018-12-18

SGX Stock Analyst Report FULLY VALUED MAINTAIN FULLY VALUED 1.77 SAME 1.77