Top Glove - DBS Research 2019-12-19: Lifted By Strong Sales Volume Growth

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Lifted By Strong Sales Volume Growth

• Net profit improved q-o-q and y-o-y, thanks to higher contribution from nitrile gloves.
• Total sales volume increased 6% q-o-q while Aspion contributed positively to earnings.
• Capacity expansion plan remains intact.
• Maintain HOLD with higher Target Price of RM4.25.

1QFY20 Results Within Expectations.

• TOP GLOVE (SGX:BVA) registered a net profit of RM111.4m in 1QFY20 (+1.2% y-o-y; +39.2% q-o-q), accounting for 25% of our full-year forecast, which is within expectations. See Top Glove Announcements; Top Glove Latest News.
• No dividend was declared in 1QFY20 as usual. See Top Glove Dividend History.

Better earnings q-o-q and y-o-y.

• The q-o-q and y-o-y improvement was mainly driven by higher contribution from the nitrile glove segment. Net margin improved to 9% in 1QFY20 compared to 7% in 4QFY19, thanks to the upward revision in selling price for nitrile gloves and 6% increase in total sales volume.
• Aspion also positively contributed to the earnings. It registered PBT of RM5m in 1QFY20 (vs loss before tax of RM4m in FY19) due to continuous improvement in production efficiency and quality as well as upward revision in selling price.

Weaker ASP y-o-y.

• The average selling price (ASP) for natural rubber and nitrile in USD terms were weaker y-o-y in 1QFY20. Nitrile raw material prices were weaker y-o-y at RM4.34/kg (-17.6% y-o-y, -1.4% q-o-q), while natural rubber latex prices were higher y-o-y at RM4.13/kg (-11.0% q-o-q).

Better EBIT/k gloves q-o-q.

• EBIT/k gloves came in at RM10.42, improving significantly q-o-q by 32.0% but this represents an 11.0% y-o-y decline. The q-o-q improvement of EBIT/k was mainly due to the higher selling price and sales volume for nitrile gloves. However, the weaker EBIT/k y-o-y showing was due to the impact of natural gas hike from Jul 2019.

Shift in production mix: higher nitrile volumes.

• In 1QFY20, nitrile gloves accounted 49% of total sales volume which increased from 42% in 4QFY19. On the flipside, latex powdered glove only accounted for 20% of total sales volume (vs 27% in 4QFY19). The switch to nitrile gloves from latex powdered gloves is due to stronger demand for nitrile gloves resulting from latex allergies. This trend is expected to continue in the future.

Lower effective tax rate in 1QFY20.

• Effective tax rate was lower at 10.8% in 1QFY20 (vs 16.0% in FY19) due to tax incentive and recognition of deferred tax assets. The tax incentive is coming from new subsidiaries that enjoy reinvestment allowance and tax allowance.

Earnings lifted on lower tax and gas tariff.

• We adjust our FY20-22 net profit upwards by 2.5%, 2.2% and 2.1% respectively to factor in lower effective tax rate and lower gas tariff. This is partially offset by higher labour cost from an increase in minimum wages.

Outlook

Capacity expansion.

• In its latest update in Dec 2019, the total installed capacity stands at 70.1bn pieces of gloves. The capacity expansion plan remains intact where F7A and F2B refurbishments are expected to commercialise in 1QCY20. Other expansion plans for CY20 include Factory F5A, Factory F40, Factory F41 (Vietnam), and Factory F8A (Thailand). These expansions will add capacity of 11.8bn gloves p.a. for CY20, raising Top Glove’s annual capacity to 81.9bn pieces at the end of CY20 – representing a 17% increase from the current installed capacity of 70.1bn pieces.
• For CY21, Top Glove aims to hit a capacity of 9.5bn pieces of gloves. We have incorporated management’s capacity expansion guidance into our FY20-21 earnings forecasts.

Focus on digitalisation and automation to save costs.

• In the medium to longer term, management will embark on digitalisation and automation efforts via the Industry 4.0 framework involving the application of Internet of Things (IoT), robotics and automated real-time manufacturing systems. This is to reduce the foreign labour reliance and improve the efficiency of the manufacturing process.

Valuation

We maintain our HOLD call with higher target price of RM4.25.

• Following our earnings adjustment, we lift our Target Price to RM4.25 (from RM4.05), based on 23x CY20 EPS. We maintain our HOLD call as it is trading at a rich valuation of 32.1x FY19 PE, above +1.0x SD of its 5-year mean PE or above +2.0SD of its 10-year mean. Using the latest FX rate of RM1 to SGD0.3274, we derive target price 1.39 in SGD term. of See Top Glove Share Price; Top Glove Target Price.
• We believe the good results on strong sales volume has priced in.
• A key re-rating catalyst for Top Glove would be a faster-than-expected recovery for its subsidiary Aspion.

Siti Ruzanna Mohd Faruk DBS Group Research | Malaysian Research Team DBS Research | https://www.dbsvickers.com/ 2019-12-19

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.390 UP 1.320