Top Glove - CGS-CIMB Research 2019-03-22: 2QFY19 ~ Look Beyond This ‘Blip’

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - 2QFY19: Look Beyond This ‘Blip’

• TOP GLOVE CORPORATION BHD (SGX:BVA)'s 1HFY8/19 net profit of RM215.8m was within expectations at 46.2% of our full-year, but below consensus at 42.8%. We expect a stronger 2HFY19.
• On a q-o-q basis, 2QFY8/19 net profit fell 3.9% due to:
  1. a weaker US$ vs. ringgit,
  2. lower average selling prices, and
  3. higher interest costs.
• Maintain ADD and Target Price of RM5.08.
• Top Glove is trading at 20.6x CY20 P/E, below +1 s.d. of its 5-year mean. Dividend yields are attractive at 4.2-5.2% (FY19-21F).

1HFY8/19 net profit of RM215.8m within expectations

• 1HFY8/19 revenue rose 27.7% y-o-y, thanks to increases in both sales volume (16% y-o-y) and average selling prices (ASPs). Top Glove’s EBITDA margin grew to 16.3% (+0.4% pt y-o-y) and EBITDA rose to RM395m (30.8% y-o-y).
• Yet, 1HFY19 core net profit came in with a lower growth quantum of 2.8% y-o-y to RM215.8m. This was due to:
  1. increase in interest expenses (>100% y-o-y) to fund the Aspion acquisition, and
  2. a higher tax rate of 18.3% (+5.9% pt y-o-y).
• This was within our expectations, at 46% of our FY19F estimate.

2QFY19: Weak q-o-q results from stronger RM and pricing pressure

• On a q-o-q basis, Top Glove’s 2QFY19 revenue and net profit came in weaker by 8.1% and 3.9%, respectively. This was due to:
  1. a weaker US$ vs. RM (-0.9% q-o-q), and
  2. pricing pressure, especially in nitrile and vinyl glove segments.
• This was despite lower raw material prices in the quarter (natural rubber: -4.2% q-o-q and nitrile: -14.3% q-o-q) that led to a decline in ASPs and a lower tax rate (-6.3% pt q-o-q).
• On a brighter note, Aspion recorded a PBT of RM3m in 2QFY19, swinging from a pretax loss in 1QFY19.

Expecting stronger results in 2HFY19

• We expect Top Glove to record stronger results in 2HFY19. This is mainly on the back of the gradual commissioning of two new plants, F32 (2.2bn p.a) and F33 (1.2bn p.a) from mid- 3QFY19 onwards. Upon full commissioning, the plants are set to grow Top Glove’s total production capacity by 5.7% to 63.7bn p.a.
• In addition, Aspion’s earnings contribution should also gradually improve along with the positive impact of a stronger US$/RM.

Impact from price competition expected to be short-lived

• Although glove makers are currently facing stiff price competition, we believe this is a short-term phenomenon (of less than 2 quarters), as glove demand remains healthy, with all glovemakers, including Top Glove, still recording volume growth.
• We also think that prices would be supported by glove makers’ slightly more cautious approach in commissioning new production lines, to improve the supply-demand dynamics.

Maintain ADD, Target Price unchanged at RM5.08

• We retain our ADD call and Target Price of RM5.08 based on 24x CY20 P/E (+1 s.d. of its 5-year historical mean). At the current 20.6x CY20F P/E, we believe that Top Glove is undervalued given:
  1. its position as the world’s largest glovemaker;
  2. it is poised to benefit from the inelastic demand for gloves; and
  3. its 3-year EPS CAGR of 10.4% (FY19-21F).
• Key risks: Heightened price competition, and/or sharp strengthening of ringgit vs. US$.

Walter AW CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-22

SGX Stock Analyst Report ADD MAINTAIN ADD 5.080 SAME 5.080