Top Glove Corporation - DBS Research 2019-03-25: Volumes On The Retreat

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove Corporation - Volumes On The Retreat

TOP GLOVE CORPORATION BHD (SGX:BVA) booked a net profit of RM105.8m in 2QFY19 (- 3.0% y-o-y; -3.9% q-o-q). This is in line with our forecast but below consensus. Forming 47% of our full-year forecast, we also deem 1HFY19 earnings (+-x% y-o-y) as in-line as the group has incoming capacity as part of its expansion plans.

Top Glove's 2QFY19 revenue came in at RM1,160.0m (+21.0% y-o-y; -8.0% q-o-q), lifted by higher sales volume (+16.0% y-o-y; +1.0% q-o-q). Revenue q-o-q was down despite higher volume as ASPs came down.
ASP in USD terms was flattish y-o-y but dipped q-o-q by 7.5%. This follows the downtrend for raw material prices whereby both natural rubber latex and nitrile eased q-o-q. Natural rubber latex price came in at RM3.62/kg (-17.7% y-o-y, -6.2% q-o-q) and that of nitrile at RM4.43/kg (- 0.8% y-o-y, -16% q-o-q).
EBIT/k gloves came in at RM10.50 (+0.1% y-o-y; -9.6% q-o-q). We believe its ASP adjustments did not account for a lower USD as the USD weakened against the ringgit from February onwards. This may take a time lag of 1-2 months to pass on such forex movements. On average, RM/USD was at RM4.10/USD during the quarter, which was 3% up y-o-y but down 1.7% q-o-q.
In terms of competition, we deem that it has yet to reach elevated levels as ASP adjustments were less than the decline in unit operating costs which came down 9% q-o-q. However we do note q-o-q volume growth has tapered off with only 1% growth q-o-q, which is similar to 1Q19’s 0.6% growth q-o-q. This is low as compared to 4%-8% growth q-o-q for 1Q18-4Q18.

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, Top Glove's expansion plan includes Factory 32, Factory 33, F2B refurbishment, F5A New Block and a new factory F40 (Phase1). This new capacity will be operational from 2QCY19 onwards progressively, with an additional capacity of 9.6bn gloves per annum. For CY20, expansion plans include F40 (2nd Phase), F42, F41 (Vietnam) and F8A (Thailand).
All in all, expansion plans will add 200 lines with 20.4bn gloves per annum. This will raise Top Glove’s annual capacity to 80.9bn gloves (+34%).
Premised on the expected completion dates provided by management, we expect Top Glove to grow its effective annual capacity by 7%/12%/11% in FY19/20/21F.

We maintain our HOLD call with a Target Price of RM4.25. (Using FX rate of 1 MYR to 0.3319 SGD as of 25-Mar, we derive target price of 1.41 in SGD term)
Our Target Price is based on a 23x CY19 EPS which is equivalent to +1SD of its 5-year mean PE. We believe the positives have already been priced in and remain cautious about the supply and demand dynamics.
A key re-rating catalyst for Top Glove would be faster-than-expected recovery of Aspion’s performance vs management’s guidance of 4-7 years.

Siti Ruzanna Mohd Faruk DBS Group Research | https://www.dbsvickers.com/ 2019-03-25

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.410 SAME 1.410