This article first appeared in The Edge Financial Daily, on October 19, 2015.

Top Glove Corp Bhd
Oct 16 (RM8.70)
Maintain buy with a higher target price (TP) of RM10.50 from RM8.78: Top Glove reported a record high quarterly net profit of RM103.1 million in the fourth quarter of financial year 2015 (4QFY15), well above expectations, on the back of a steep 6% quarter-on-quarter (q-o-q) depreciation of the ringgit against the US dollar and a 7% q-o-q increase in sales volume. 

Going forward, margins could sustain at current levels on improving production mix and productivity gains from its automation drive. Its current valuation continues to lag behind peers.

The record high quarterly net profit of RM103.1 million (+42.7% q-o-q; +124.6% year-on-year) in 4QFY15 brought full-year net profit to RM280.1 million, accounting for 105% and 112% of our and consensus full-year estimates respectively.

Sales volume rose 7% q-o-q in 4QFY15, thanks to a higher utilisation rate of 80% (3QFY15: 75%) arising from a production ramp-up at Factory F29 and a higher utilisation rate at its China factory (4QFY15: 80%; 3QFY15: 70%). 

The group continued to experience a strong pickup in nitrile glove sales volume during the quarter, which lifted its production mix of nitrile gloves to 32% in 4QFY15 (3QFY15: 30%). Together with a q-o-q stable average selling price (ASP) and a steep 6% q-o-q depreciation of the ringgit to RM3.86 per US dollar (3QFY15: RM3.64), top line rose 7.3% q-o-q in 4QFY15.

The pullback in the US dollar to RM4.10 per US dollar currently was largely expected, following its steep 27.5% year-to-date appreciation against the ringgit to a multi-year high of RM4.46 per US dollar in end-September.

Nevertheless, we expect the recent US dollar weakness to be temporary and the greenback should continue to sustain at well near the RM4.00 per US dollar mark for the rest of this year. 

We believe this would allow for sufficient room to offset the deteriorating nitrile glove ASP and thus alleviating the risk of near-term margin compression in the segment. 

Our sensitivity analysis suggests that every 1% appreciation in the US dollar against the ringgit would lift Top Glove’s FY15 to FY17 earnings by 5% to 6%.

We maintain our “buy” call on Top Glove, with a higher TP of RM10.50 based on 18 times FY16 forecast per earnings.

While the sector’s valuation has largely priced in most of the near-term positive catalysts, we continue to see Top Glove as an attractive proposition on valuation grounds. — UOBKayHian, Oct 16