Top Glove shares climb on rating upgrade

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KUALA LUMPUR (March 25): Top Glove Corp Bhd, the world's largest rubber glove manufacturer, rose as much as 2.03% this morning after a rating upgrade by Affin Hwang Capital Research.

Top Glove was among the top gainers this morning. At 11.23am, the counter rose six sen or 1.35% to RM4.49 with 1.5 million shares traded.

In a note today, the research house upgraded Top Glove to a "buy" with a lower target price (TP) of RM4.90, from RM6, and said the upgrade is based on the group's valuation after the research house lowered the TP.

"Apart from the EPS (earnings per share) cut, we have also lowered our TP to RM4.90, as we lower our PE (price-earnings) multiple to 24 times (+1SD) from 27 times and roll forward our valuation base to calendar year 2020 [CY20E]," it said.

Affin Hwang Capital said the cut in PE multiple is to reflect the risk related to the group's China operations.

The research house noted that Top Glove reported a weaker-than-expected set of financial performance for the cumulative six months ended Feb 28, 2019 (1HFY19), delivering only 40% and 43% of the research house's respective forecast.

The research house said the weakness was partly due to weaker contribution from Top Glove's China operations.

"Excluding its China operations, profit before tax (PBT) would have increased by 14.3% instead of the recorded 8.5%," said the research house, explaining that the China operations made earnings before interest and tax (EBIT) of RM1.3 million in 1HFY19, which is significantly lower than the RM6.3 million recorded in 1HFY18, and were negatively impacted by the change in the recent environmental regulation, which has allowed some manufacturers to resume production despite using coal as a heating source.

In addition, the increase in the availability of capacity that has driven vinyl glove average selling prices (ASPs) lower and the strengthening of the ringgit against the greenback are hurting Top Glove's profitability.

As such, the research house has cut the EPS forecast for financial year ending 2019 and 2020 (FY19-20E) by 13%-15% to factor in the weaker performance from Top Glove's China operations, the lower-than-expected interest cost savings, and the lower profitability from the volatility of the currency.

Top Glove announced its net profit for the second quarter ended Feb 28 (2QFY19) dipped 3% year-on-year (y-o-y) to RM105.79 million, from RM109.1 million, due to higher income tax obligations, as its tax reduction allowance had been reduced.

Quarterly revenue grew 21% y-o-y to RM1.16 billion from RM958.44 million, due to stronger sales growth on the back of higher global demand and average selling price for its product.

For 1HFY19, it posted a y-o-y increase of 0.6% in net profit to RM215.85 million from RM214.46 million. Revenue grew 27.7% to RM2.42 billion from RM1.9 billion in the previous corresponding period.