TOPGLOV (7113) - Top Glove - Resiliency At The Top

Top Glove’s 1QFY16 (Aug) earnings trounced expectations, making up 35%/41% of ours and consensus estimate respectively. Maintain BUY with a revised MYR13.82 TP (from MYR11.61, 17% upside).Earnings were up 25% QoQ on the back of better-than-expected revenue and improved operating efficiency.

Record quarter yet again. Top Glove reported record 1QFY16 (Aug) earnings that trounced ours and consensus estimates. Earnings were up 25% QoQ, on the back of increase in revenue (+12.8% QoQ), improved operating efficiency, higher USD (+10.9% QoQ), favourable raw materials prices (latex: -9.8% QoQ, nitrile: -4.6% QoQ) as well as lower effective tax rate.

Earnings resiliency. We were positively surprised by the resiliency of its 1QFY16 earnings. W e believe that it has managed to hold on to the majority of its forex gains and lower raw material savings as revenue rose 12.8% QoQ. This is despite a 1% QoQ increase in sales volume. Going forward, the resiliency of the ASP would be more protracted than initially expected due to: i) the strong global glove demand growth, and ii)Top Glove’s clientele base which is more diverse relative to its peers.

Outlook. Top Glove continues to be optimistic on the prospects of the global glove demand. Further expansion plans would bring total capacity to 52.4bn gloves (+7.8bn) by Feb 2017, which would help support FY16-17 earnings growth. Management has also reiterated its commitment toautomation as well as research and development drive to improve operating efficiency. This is to offset the challenges of rising competition and increases in utilities cost. It is also on a prowl for further M&A activities, previously hinting that it has prepared a MYR1bn war chest.

Maintain BUY. We continue to be impressed by the resiliency of Top Glove’s earnings. We revised our FY16-18 earnings forecast by 13-17% after adjusting for better-than-expected ASP and operating efficiency. Maintain BUY with a revised DCF-based TP of MYR13.82 (CoE: 8.3%, TG: 2%), with an implied FY16F P/E of 20x. The stock is currently trading at 17.1x FY16F P/E and we expect its operational outperformance to close the 24% valuation discount compared to sector average of 21.1x (Figure 6). Risk to our recommendation would be the de-rating of the sector driven by liquidity as investors switch out of non cyclical stocks on signs of abating market uncertainties.

Source: RHB Research - 16 Dec 2015
TOPGLOV (7113) - Top Glove - Resiliency At The Top
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