Top Glove - Maybank Kim Eng 2019-03-11: Signs Of Rising Competition

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Signs Of Rising Competition

Lowering earnings estimates and target price; maintain HOLD

• Top Glove Corporation (SGX:BVA)'s upcoming 2QFY8/19 earnings could be flattish sequentially and y-o-y, and come in below expectations.
• We lower our FY19-21 EPS estimates by 7- 10% as we see rising competition in the near-term. Consequently, our Target Price is reduced to MYR4.60 (-10%) based on an unchanged CY20 PER target of 24x (10% below our target PER for Hartalega).
• Maintain HOLD.

2QFY19E: Expect flattish earnings

• Top Glove’s 2QFY19 results is scheduled to be released on 22nd Mar. We expect earnings to be flattish q-o-q and y-o-y (1QFY19: MYR110m; 2QFY18: MYR109m):
  1. volume growth could be flattish q-o-q (but +10-15% y-o-y) given that no new capacity was added since 1QFY19 and its overall plant utilisation rate is already maxed out at 90% since 2QFY18;
  2. EBITDA margin could also be flattish q-o-q and y-o-y as the lower NBR cost offset the lower USD/MYR;
  3. Aspion could turn slightly profitable in 2QFY18 (1QFY19: MYR3-4m net loss) owing to the improved productivity.
• Despite +10-15% y-o-y volume growth in 2QFY19, earnings could be flattish y-o-y due to a higher tax rate (2QFY18: 12%).

More supply from China?

• While there is no production data from China, we highlight that the vinyl glove ASP has been on a downtrend since Mar 2018 and has fallen to a 5- year low of USD10/’000 pcs in Mar 2019 (-9% m-o-m), signalling a much higher supply of vinyl gloves currently.
• Though vinyl glove is mainly used in the non-medical segment, Malaysian glove players also benefitted somewhat in 2017-18 as they produced the cheaper vinyl glove to fill the supply vacuum. Hence, a resumption of China’s supply may also affect Malaysian players’ volumes/margins slightly. Vinyl gloves contributed 3% to Top Glove’s revenue in 1QFY19.

Revisiting assumptions

• We lower our FY19-21 EPS forecasts by 7%/10%/8% as we lower EBITDA margin assumptions by 0.3-ppt/0.5-ppt/0.3-ppt.
• However, because of consolidation of Aspion’s full-year earnings in FY19, our projected FY19- 21 EBITDA margins would still be higher than that of FY18 (+0.4-0.6-ppt).

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-03-11

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.60 DOWN 5.100