Top Glove - Maybank Kim Eng 2019-09-24: Diversified Portfolio

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Diversified Portfolio

But earnings recovery priced in; maintain HOLD

• Despite its more diversified glove portfolio, TOP GLOVE CORPORATION BHD (SGX:BVA) was similarly affected by stiff competition in 1HCY19. Although we expect earnings to improve with a pick-up in demand for its nitrile medical gloves, our earnings forecasts already impute a strong earnings recovery.
• Maintain HOLD and Target Price of MYR4.85, at 26x CY20E P/E or a 10% discount to our target for Hartalega in view of its lower margins/ROEs.
• Prefer Kossan in the sector (BUY, Target Price MYR5.10) for its exposure in the non-medical segment and undemanding valuation.

Affected by competition in 1HCY19

• We estimate that rubber medical gloves account for 85% of its sales volume. They are followed by plastic gloves, at 9%. Plastic gloves are facing a structural decline while rubber non-medical-glove sales, at 6% of its sales volume, are rising.
• Though non-medical gloves cushioned its earnings from weakness in other segments in 1HCY19, we believe a spike in latex costs affected its earnings.

Strong demand for its nitrile medical gloves

• Reflecting a pick-up in global glove purchases, the sales lead time for its nitrile medical gloves has risen to 50-60 days from 30-45. We believe global demand has picked up after purchasers’ minimal purchases in 1HCY19 amid trade-war uncertainties. Now that the US has implemented import tariffs on all of China’s gloves (except surgical gloves), we think importers are more certain of their total purchase costs.

Better q-o-q but weaker y-o-y 4Q

• 4QFY8/19 results are scheduled for release on 26 Sep. We expect net profit to be better q-o-q but weaker y-o-y (3QFY19: MYR75m, 4QFY18: MYR102m). We think there could be volume growth, driven by new capacity from F32 (Phase1) and F33, which will raise its total capacity by 6% upon full commencement.
• Margins may also improve q-o-q from higher latex glove ASPs and lower latex costs.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-09-24

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.850 SAME 4.850