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Wednesday, June 19, 2019

Top Glove Corporation Berhad - Dragged By Higher Input Costs

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Top Glove reported a weak set of results with 9MFY19 earnings falling by 12.5% YoY to RM290.5m. This came in below both our and street estimates at 67% and 63% respectively. The discrepancy in our forecast was due to lower operating cost assumption. Lackluster results were attributed to the sharp rise in raw material prices and time lag in fully passing on the higher costs, which usually takes 2-3 months. Top Glove’s margins were compressed as a result. To account for the higher cost, we revise our operating cost assumption upwards and cutting our FY19F and FY20F earnings by 10% and 5% respectively. We reiterate our Underperform call but our TP is revised up to RM4.15 (RM3.75 previously) as we rollover our valuation to CY20, based on 22x PER, which is in line with 5-year sector average. Top Glove also declared an interim dividend of 3.5sen per share, unchanged compared to last year.
  • Revenue improved but hit by higher cost. Top Glove reported revenue of RM1.19bn (+2.6% QoQ) in 3QFY19, underpinned by stronger sales (+2% QoQ). ASP for nitrile gloves was revised upwards marginally (+3% QoQ), but the ASP for latex gloves was flat (-1% QoQ), despite the sharp increase in natural rubber prices (+22% QoQ). Time lag in ASP revision and intensified competition has resulted in margins erosion. Correspondingly, EBIT fell 28.3% QoQ to RM150.7m and EBIT margins declined to 8.8% this quarter (as opposed to 12.5% in 2QFY19). Lower tax expense of RM7.1m, due to the reversal of overprovision in income tax, has helped to slightly cushion the impact of latex prices increase. Net profit was also down by 29.5% QoQ to RM75.2m.
  • Segmental Information. In this quarter, China operation continues to suffer from a loss of RM1.8m, due to the oversupply condition of vinyl gloves in China. The sales volume of vinyl gloves fell by 32% QoQ. ASP for vinyl gloves fell c.28% YoY to USD11.50 per thousand pieces. Thailand also reported lower profit of RM3.5m (-35%QoQ), in tandem with the lower revenue of RM91m (-5.7% QoQ) reported.
  • Aspion. Contributed RM139.4m to the Group’s topline this quarter. Impairment assessment conducted showed that no impairments needed to be made at this juncture, since Aspion is able to generate sufficient cashflow to offset the goodwill recorded in the books of Top Glove. While the Group remains committed to make Aspion more profitable going forward, Aspion is not expected to contribute to the Group’s bottomline meaningfully in the near term.
  • Outlook. F32 1st Phase (+2.2bn pcs p.a) has begun production approximately one month back, with 8 lines commissioned. Plant F33 (+1.2bn pcs p.a) has also recently began producing. Construction of vinyl glove plant in Vietnam is underway, which will allow Top Glove to take advantage of the lower labor and lower energy cost considering that factories can use coal-fired burners in Vietnam. The vinyl glove factory is expected to be ready by mid CY2020.
Source: PublicInvest Research - 19 Jun 2019

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