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Wednesday, October 19, 2016

Top Glove Corporation Berhad - Still Challenging

Author: PublicInvest | Publish date: Wed, 19 Oct 2016, 09:06 AM

We attended Top Glove’s 4QFY16 results briefing on Tuesday, hosted by Tan Sri Lim Wee Chai (Chairman) and the management team. We are maintaining our Neutral recommendation with an unchanged TP of RM4.62, as we do not see any re-rating talysts in near term. We remain utious on the Group’s outlook going forward, given the absence of a US Dollar effect and allenges faced as competitive pressures intensify amid mounting st pressures.

FY16 results key takeaways. To recap, the group’s full year FY16 earnings rose 29.1%, led mostly by favourable external factors, particularly i) lower raw material prices, in which natural rubber latex and nitrile latex were lower 0.2% and 6.7% respectively, and ii) stronger US Dollar (+15.9% YoY). 

Overall FY16 sales volume recorded healthy growth (+11%), helped by all types of gloves except powdered latex (-8%). The increment was hampered partly by i) lower average selling prices (-11.6%), dragged further by stiffer pricing competition in the nitrile segment, and ii) rising st pressures from natural gas (+21.5%) and labour st (+1.9%), however. The group targets to expand its nitrile pacity by an additional 6bn pcs/annum through the recently acquired factory in Klang, under two phases. Phase 1 with 1.4bn is targeted to mmence in August 2017, while Phase 2 in May 2018.

Geographical sales. The group will ntinue to focus on nitrile gloves in developed untries, evident in its European sales mposition increasing from 28% in FY15 to 33% in FY16, though sales in North America decreased slightly from 30% in FY15 to 28% in FY16. The group rrently offers more variants of nitrile gloves such as natural grip gloves, two-toned loured gloves, and accelerator free gloves for better positioning with its stomers. The group is targeting 10% sales volume growth in FY17 with better product offering, and to penetrate into Brazil, Columbia, Argentina, Saudi Arabia, Egypt, China and India.

Maintain Neutral. We maintain our Neutral stance with an unchanged TP of RM4.62 owing to the lack of re-rating talysts (a further strengthening of the US Dollar, rebound in average selling prices, unexpected health-related epidemic) in the near term. We remain utious over Top Glove’s near term outlook given the uncertainty of forex movements and mounting st pressures. Downside risks to our earnings estimates include weakening of the US Dollar, further weakness in its ASP amid heightened mpetition and any deferment on its expansion plans.

Source: PublicInvest Research - 19 Oct 2016

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