Top Glove recovers from selldown caused by lower earnings

This article first appeared in The Edge Financial Daily, on June 20, 2019.
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KUALA LUMPUR: Top Glove Corp Bhd’s share price rebounded yesterday, erasing part of the previous day’s 2.67% drop due to a selldown after the group reported weaker quarterly results.

The stock rose by as much as 1.43% before paring some gains to close the day at RM4.90 for a three sen or 0.62% gain. This gives the group a market capitalisation of RM12.55 billion.

Some 2.46 million shares were traded yesterday, lower compared with the counter’s 200-day average trading volume of 6.36 million shares.

On Tuesday, the glove maker’s share price declined by as much as 7.07% after it announced lower earnings for the third quarter ended May 31 (3QFY19). It was one of the top losers on Bursa Malaysia that day.

Top Glove’s net profit for 3Q fell 36.5% to RM74.67 million, from RM117.57 million a year ago, owing to higher latex prices. Latex is a raw material to manufacture rubber gloves.

Revenue, however, improved 8.1% to RM1.19 billion from RM1.1 billion, backed by growth in sales volume.

The weak quarterly result also hit the group’s cumulative net profit for the nine months (9M) ended May 31, which fell 12.5% to RM290.51 million from RM332.03 million a year earlier. However, the 9M revenue rose to RM3.61 billion from RM3 billion previously.

According to Bloomberg, of the analysts who track the glove maker, eight have a “buy” calls, 11 “hold” calls, and three “sell” calls.

While most analysts concur that the quarterly earnings were disappointing, they are convinced that the group’s performance will see some improvement in the current quarter after the upward revision in the average selling price (ASP) of its gloves.

Hong Leong Investment Bank Bhd, which has maintained a “buy” call on Top Glove with an unchanged target price (TP) of RM5.31, expects the group to conclude the current financial year on a better standing.

This is thanks to the raising of the ASP of the latex by 8.8% from May onwards, which should normalise the group’s margin going forward, it said.

Similarly, MIDF Research, in a note yesterday, maintained its “neutral” call on the company with a slightly lower TP of RM4.75 (RM4.70 previously).

 “We view that the group’s outlook will continue to be underpinned by stable and steady growth in demand of disposable medical glove as health regulations become more stringent.

“In addition, we expect finance cost to remain elevated as the expansion will be funded via borrowings. That said, we believe that the diversity of its existing product range as well as Top Glove’s position as the world’s largest glove manufacturer serves as a competitive advantage over other major glove manufacturers,” the research house added.