Top Glove - Maybank Kim Eng 2018-12-18: Better Earnings Ahead

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Better Earnings Ahead

To remain Shariah-compliant; maintain BUY

• Stronger 1QFY8/19 earnings was within our expectation and street’s.
• We expect sequential earnings to be better on lower input costs, capacity addition and better earnings from Aspion. 
• Maintain our earnings forecasts, BUY call and Target Price of MYR6.43 (based on 30x 2020 PER; 10% discount to our target PER for Hartalega).
• Top Glove should remain in Securities Commission’s Shariah list in the next review in May 2019.

Results within expectations

• Top Glove's 1QFY19 core net profit of MYR110m (+8% q-o-q, +9% y-o-y) made up 22% of our and street’s full-year forecasts.
• Net gearing remained elevated at 75% (end-4QFY18: 77%) due to the acquisition of Aspion. However, conventional debt/total asset stood at approximately 30% as at end- 1QFY19 (similar to its FY18 annual report), below the Securities Commission’s Shariah threshold of 33%.

1QFY19: Stable sales volume, ASP and margin

• Key takeaways from 1QFY19 results:
  1. Revenue grew slightly q-o-q (+4% q-o-q, +35% y-o-y) due to higher USD/MYR (+3% q-o-q -1% y-o-y) and marginally higher sales volume (+1% q-o-q, +19% y-o-y). Meanwhile, ASP was flattish q-o-q (+14% y-o-y);
  2. EBITDA margin dipped slightly to 16% (-0.3-ppt q-o-q, +0.7-ppt y-o-y) owing to the weaker vinyl earnings. The EBIT of its vinyl division weakened substantially to MYR2m (-70% q-o-q, -77% y-o-y) following the full resumption of supply in China;
  3. Aspion registered a net loss of MYR3-4m (4QFY18: MYR4m net profit) given the ongoing upgrading works at its plants;
  4. Group’s effective tax rate was lower q-o-q at 21% (-6.9- ppt q-o-q, +8.1% y-o-y) as there was additional provision for taxes in 4QFY18.

Expect better quarters ahead

• Earnings could be better ahead as we think its margins could improve on lower input costs. Additionally, new capacity from F32 (phase1) and F33 would commercialise in 2Q-3QFY19 (+6% to 63.9b pcs p.a.), hence, lifting its sales volume in the near-term.
• Moreover, Aspion could turn profitable in 2HFY19 upon the resumption of some of its production lines (the entire upgrading works is expected to complete in FY20).

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-12-18

SGX Stock Analyst Report BUY MAINTAIN BUY 6.43 SAME 6.43