Expect Top Glove 4Q to be sequentially stronger

TheEdge Thu, Jun 22, 2017 10:36am - 6 years View Original


Top Glove Corp Bhd
(June 21, RM5.60)
Maintain hold with a higher target price of RM5.80:
We attended Top Glove Corp Bhd’s third quarter of financial year 2017 (3QFY17) financial results briefing. Key highlights included: i) 3QFY17’s earnings weaker quarter-on-quarter (q-o-q) on deferred orders and higher costs; ii) product mix continues to skew towards nitrile gloves; iii) ambitions to grow glove capacity and extend global leadership intact; and iv) the group’s potential entry into condom manufacturing.

We expect 4QFY17 to be sequentially stronger on the back of higher sales volume, and demand is expected to be supported by lower average selling prices (ASPs). Our FY17/FY18/FY19 earnings estimates are adjusted by -0.5%/+0.2%/+0.4% upon performing housekeeping to our model.

To recap, Top Glove’s 3QFY17 net profit declined by 6.4% q-o-q to RM77.7 million. The weaker q-o-q performance was primarily due to lower sales volume and the time lag in passing through the climbing costs of raw materials during 2QFY17. Sales volume declined by 5% q-o-q as upward revisions to ASPs of 9% q-o-q to pass through the higher costs of raw materials led to some orders being deferred.

The average prices of natural rubber latex and nitrile latex respectively increased by 18.7% q-o-q to RM7.06 per kg and 24.1% q-o-q to US$1.34 (RM5.75) per kg. The decline in margins, however, was marginal with earnings before interest, taxes, depreciation and amortisation (Ebitda) margins declining by 0.7 percentage point q-o-q attributable to improved efficiency and cost management.

For nine months of FY17 (9MFY17), the group recorded sales volume growth of 5% year-on-year (y-o-y). Growth was recorded across all glove types except for latex powdered gloves which declined by 19% y-o-y in part due to the US Food and Drug Administration’s ban on powdered medical gloves.

In terms of product mix, there continued to be a skew away from latex gloves towards nitrile gloves with the latex:nitrile mix evolving from 65:35 in 9MFY16 to 59:41 in 9MFY17. This is in tandem with the market’s growing demand and preference for nitrile gloves over the years.

By geography, the group’s sales are still mainly derived from developed regions. In descending order, sales volume contributions in 3QFY17 was led by North America (32%), followed by Europe (29%), Asia (21%), Latin America (10%), the Middle East (6%) and Africa (2%).

The group remains focused on growing its glove capacity and extending market leadership. Its latest capacity of 48 billion pieces per annum represents an estimated global market share of 25% and the group targets to achieve 30% by 2020.

Fuelling the group’s near-term expansion plans include the targeted addition of 11.7 billion pieces per annum over 2017 to 2018 primarily focused on nitrile gloves. This includes the recent acquisition of two latex rubber glove factories in Nilai (F33) and Muar (F34) with a combined capacity of 1.1 billion pieces per annum.

While F33 and F34’s capacity accretion of about 2% to the overall group is relatively small, management alluded to synergistic benefits which includes a stronger presence in China via ownership of the vendor’s customers as well as reduced competition for the group.

In the meantime, management also alluded that it is mulling a potential entry into condom manufacturing considering the similarities in technologies adopted by both businesses. While still in the preliminary stages, capital expenditure for the new venture was guided at RM20 million to RM30 million.

We expect 4QFY17 to be sequentially stronger on the back of higher sales volume. Demand is expected to be supported by lower ASPs as the group begun to pass through cost savings from the general downtrend in raw material prices during 3QFY17.

Current plant utilisation rates are guided at above 80%. Besides, we also do not discount the possibility of the group benefiting transitorily from the further decline in raw material prices post 3QFY17. Prices of natural rubber latex was on a downtrend from RM6.34 per kg as at end-May to RM5.55 per kg at its last closing, representing a 12.5% decline.

Key risks include fluctuations in the US dollar against the ringgit and raw material prices (natural latex and nitrile butadiene rubber). — TA Securities, June 21

The content is a snapshot from Publisher. Refer to the original content for accurate info. Contact us for any changes.






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