Top Glove - Maybank Kim Eng 2019-06-27: Watch Latex Costs

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Watch Latex Costs

Sequential earnings could improve substantially on higher latex glove ASPs and seasonally lower latex costs. Although we maintain our forecasts, we raise our Target Price by 9% to MYR4.85 on a higher CY20E P/E target P/E of 26x from 24x; This is in view of its rising margin/ROE prospects due to Aspion’s surgical gloves and inclusion in FBMKLCI 30 since Dec 2018.
Our new target is still 10% below our 29x target for Hartalega due to TOP GLOVE (SGX:BVA)’s lower margins/ROEs.

Top Glove's 3QFY19 net profit, down 29% q-o-q and 37% y-o-y, was hit by high latex costs and intense competition. However, we expect earnings to improve substantially in 4QFY19E as latex-glove ASPs have already been raised to reflect the higher latex costs while latex costs are expected to be seasonally lower.
Additionally, new capacity from F32-33 (+6% to 63.9b pcs in Jun 2019) may lift sales volumes. Plant utilisation is high at 90%, excluding F32-33.

Expansion of another eight plants has been delayed by 3-6 months. Management attributes this to delays in construction and gas-supply issues.
Separately, Top Glove recently launched its new nitrile biodegradable glove which could yield better margins as its ASP is 10% above those of normal examination gloves.
Our earnings model assumes sales volume growth of 14%/11%/11% for FY19-21E.

We think Top Glove may not benefit much from a potential 25% tariff on China’s medical gloves. Top Glove has a bigger presence in non-US markets, which may be disrupted if China diverts its gloves from the US to these markets.
It may also not benefit much from a potential removal of Thailand/Indonesia from the US GSP list.
Non-medical rubber gloves produced by Top Glove’s factories in Malaysia are not substantial, at < 10% of its sales volume.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-06-27

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.85 UP 4.450