This article first appeared in The Edge Financial Daily on October 17, 2017
Top Glove Corp Bhd
(Oct 16, RM6.39)
Maintain neutral with an unchanged target price (TP) of RM5.93: Top Glove Corp Bhd financial year 2017 (FY17) net profit of RM332.7 million marginally exceeded our estimates, meeting 102.4% of full-year forecasts, though below consensus’ at only 82.8%. Revenue met a record high of RM3.4 billion (+18% year-on-year [y-o-y]), largely attributed to a rise in average selling price (ASP) from the surge in raw material prices supported by a 7% y-o-y increase in sales volume. Earnings however remained hindered by the competitive environment and continued cost pressures, recording RM331.7 million (-7.9% y-o-y) attributed to the better results in FY16, which then benefited from a stronger US dollar and lower raw material prices. We maintain that Top Glove should see better results ahead, with higher sales of nitrile gloves, which command a higher ASP coupled with new capacity and internal efficiencies credited to ongoing improvement in the manufacturing process, which enabled the group to manage costs more efficiently, reduce wastage while improving its glove quality. A final dividend of 8.5 sen per share was declared for the year, subject to approval. This is in line with the group’s policy to pay 50% of its earnings. Top Glove separately also announced the proposed RM47.3 million acquisition of Eastern Press Sdn Bhd. We continue to maintain our “neutral” call with an unchanged TP of RM5.93 as we believe growth has been priced in.
Top Glove’s revenue for the fourth quarter of FY17 grew 3.8% to RM902.4 million, with profit before tax (PBT) at RM99.1 million (+8.3% quarter-on-quarter [q-o-q]) owing to the exceptionally high 14% growth q-o-q in sales volume. PBT continued to improve q-o-q on better product quality and manufacturing efficiencies, together with new oncoming capacities and stronger demand.
For FY17, the average natural rubber (NR) price surged 46.4% y-o-y to RM5.76 per kilogramme, with synthetic rubber also rising 11.9% to US$1.10 (RM4.64) per kilogramme y-o-y. The higher NR price was due to adverse weather impacts limiting supply, while demand from China was also stronger.
Separately, the group last Friday entered into a term sheet with YS Hoong Sdn Bhd for the proposed acquisition of the entire ordinary shares in Eastern Press for RM47.3 million. Eastern Press is the major supplier of packaging materials to the group’s current operations in Malaysia. The proposed transaction is thus expected to provide Top Glove with synergistic benefits, such as improvement in its supply chain coordination, thereby allowing for flexible planning and better delivery time in relation to the supply of packaging materials for its glove products, as well as better cost and quality control. — PublicInvest Research, Oct 16