Top Glove outlook seen positive due to better quarters ahead

TheEdge Mon, Nov 18, 2019 10:07am - 4 years View Original


Top Glove Corp Bhd
(Nov 15, RM4.51)
Upgrade to buy with a higher target price (TP) of RM5.20:
Despite the significant gain in market share (sales volume) by Chinese manufacturers for glove sales to the US (which has risen from 10.2% in 2018 to 14.2% in September), Malaysia still remains as the market leader with a 74.2% share.

 
The gain in market share has nevertheless impacted overall demand from Malaysian manufacturers like Top Glove Corp Bhd, as overall glove imports from the US only grew by 1% year-on-year (y-o-y) for the first nine months in 2019. Malaysian manufacturers were not the only casualties, as Thailand and Indonesia also recorded 4% and 19% declines in their sales to the US. We believe that Malaysian manufacturers will start gaining market share in the coming months as the 15% tariff on Chinese gloves was implemented since September.

We believe that sentiments towards the sector would improve as the recovery in demand starts to be reflected in the manufacturers’ books starting with the fourth quarter of 2019 (4Q19) results.

Although there are concerns about rising competition from Thailand, given that Sri Trang Gloves is aggressively building capacity as they prepare for an initial public offering (IPO) in 3Q20, we believe that Sri Trang is unlikely to cut prices further to compete for market share gains as their new capacity will only be ready by the second half of 2020. Rubber glove manufacturers with significant exposure in the latex glove segment such as Top Glove were impacted by the price pressure.

As we are taking a more positive stance towards the sector and Top Glove’s outlook, we are raising our TP to RM5.20 from RM4.10 based on a higher 31 times estimated 2020 price-earnings ratio (PER) (+1 standard deviation [SD]) from the previous 24 times.

We believe that at a PER of +1SD, valuations are still palatable due to its decent earnings growth. Key downside risks to our investment thesis are: i) a sharp increase in volatility of RM/USD; ii) an unexpected increase in operating cost; iii) irrational competition among its peers; and iv) the removal of Top Glove from the FBM KLCI index. — Affin Hwang Capital, Nov 15

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