Top Glove - Maybank Kim Eng 2019-06-19: Positive Mismatch In 4QFY19?

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Positive Mismatch In 4QFY19?

Worst is over; maintain HOLD

• TOP GLOVE CORPORATION BHD (SGX:BVA)'s weaker 3QFY19 net profit (-29% q-o-q; -37% y-o-y) was below our/ market’s expectations due to a spike in latex cost and strong competition affecting ASP.
• We expect earnings to recover in 4QFY19 on margin recovery due to a higher latex glove ASP and lower latex cost.
• We cut FY19E EPS by 7% to impute the weak 3QFY19; FY20-21E are unchanged. Maintain HOLD and Target Price of MYR4.45, based on an unchanged 24x CY20 PER (10% below our target PER for Hartalega due to its lower margins/ROE).

Below expectations

• Top Glove's 3QFY19 net profit of MYR75m brought 9MFY19 net profit to MYR291m (- 13% y-o-y), making up just 68%/64% of our and street’s full-year estimates. The shortfall was due to higher-than-expected latex cost and the Group’s inability to pass it through to the market.
• Separately, a first interim DPS of 3.5sen (flattish y-o-y) was declared.

Hit by higher latex cost and strong competition

• Key takeaways on 3QFY19 results:
  1. Revenue was better (+3% q-o-q, +8% y-o-y) on higher sales volume (+2% q-o-q, +9% y-o-y);
  2. However, EBITDA was weaker (-20% q-o-q, -16% y-o-y) as margin fell to 12.8% (-3.6ppt q-o-q, - 3.7ppt y-o-y) on the jump in latex cost (+24% q-o-q, +4% y-o-y; 45% of latex glove production cost). Meanwhile, latex glove ASP was only raised by 8% due to the normal time lag of 2-3 months and strong competition;
  3. Recovery at Aspion remained slow with PBT of MYR4m (3QFY18: MYR3m).

Cut FY19E EPS by 7%

• Management is confident of better earnings in 4QFY19 and guided for Group EBITDA margin to return to the 15-16% level. This would be underpinned by the higher latex glove ASP in Jun-Jul (+9% from May), while latex cost is also now on a downtrend (-1% from May).
• Our revised FY19E EPS has incorporated a 15% higher latex cost assumption to impute the weak 3QFY19. We maintain our sales volume growth forecast of +14% for FY19E (9MFY19: +15%).

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-06-19

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.450 SAME 4.450