Top Glove - Maybank Kim Eng 2019-09-27: Results Disappointed


Top Glove - Results Disappointed

But we expect improvement ahead; maintain HOLD

  • TOP GLOVE CORPORATION BHD (SGX:BVA)'s 4QFY19 net profit was below our/consensus expectations on weak sales from stiff competition in the latex segment. However, competition has subsided and we expect Top Glove to benefit temporarily from the trade war.
  • We reduced our FY20-21F EPS by 11-13% and introduce FY22F. Our Target Price is also reduced to MYR4.30 (-11%), pegging to an unchanged CY20F P/E of 26x (10% discount to our target P/E for Hartalega).
  • Our preferred pick is Kossan (BUY, Target Price MYR5.10) for its exposure in the non-medical segment and undemanding CY20F P/E of 22x.

Results below our/consensus expectations

  • Top Glove's 4QFY8/19 net profit of MYR80m (+7% q-o-q, -21% y-o-y), brought FY19 net profit to MYR371m (-15% y-o-y) and made up 93%/90% of our/street’s full-year estimates.
  • The company also declared a final DPS of 4sen, bringing full-year DPS to 7.5sen (-12% y-o-y), representing 51% of FY19 net profit. See Top Glove's dividend history.

Affected by stiff competition in latex segment

  • Despite a higher overall ASP (+5% q-o-q), revenue was flattish q-o-q on weaker sales volume (-5% q-o-q). There was volume weakness in the latex segment (-12 to 23% q-o-q), potentially due to competition from Sri Trang (SGX:NC2).
  • Nitrile volume was stronger (+12% q-o-q), potentially due to a faster demand for its nitrile non-medical gloves, a result of the structural demand shift from plastic vinyl. Its plastic glove recorded weaker revenue (-17% q-o-q, -54% y-o-y) and wider EBIT loss of MYR4m (3QFY19: MYR2m);
  • Aspion sank into a pretax loss of MYR4m (3QFY19: MYR4m PBT) as the operation of the sterile vendor was affected.

Temporary boost from US-China trade war

  • Earnings may improve in 1QFY20 on strong demand for its nitrile glove following US 15% tariff on China’s rubber examination gloves. Also, we understand that the latex gloves sales have also improved slightly, potentially due to better global demand.
  • Nevertheless, we reduce our FY20-21F EPS by 11%/13% as we trim our ASP assumption for latex glove by 3% p.a. as we think stiff competition may recur given Sri Trang’s ambition of becoming world’s top 3 glove producer (5th largest now).

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-09-27
SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.30 DOWN 4.850