Top Glove recorded a flattish 1HFY19 net profit of RM215.8m, coming in below both ours and consensus’ estimates at 42% and 43% respectively. The discrepancy in our forecast was due to higher-than-expected operating cost and interest expense. We tweak our operating cost assumption upward but maintain our interest cost forecast as we expect it to improve due to the issuance of convertible bonds. As such, our FY19F earnings forecast is reduced by 5%. However, we cut our PE multiple to 21x FY19F EPS in view of a moderating demand growth with new capacities coming on stream. Consequently, our TP is revised to RM4.20 (from RM5.70 previously). Maintain Neutral on Top Glove.
2QFY19 revenue down 8.1% QoQ while net profit fell 3.9% QoQ . Top Glove reported 2QFY19 revenue of RM1.16bn (-8.1% QoQ) due to lower ASP arising from lower raw material cost and pricing pressure, despite sales volume growing by 1% QoQ. Profit before tax and net profit also eased to RM125.5m (-11.6% QoQ) and RM105.8m respectively (-3.9% QoQ). Operations from Malaysia (-3% QoQ), Thailand (-21% QoQ) and China (-17% QoQ) all reported weaker revenue in this quarter. We believe the weaker results posted by Thailand was due to pressure on ASP and competition in the natural rubber (NR) gloves segment, while China operations is seeing normalization following a disruption in the vinyl glove market last year. Despite the weaker results, PAT margin improved by 4.5% QoQ, from 8.7% to 9.1%, attributed to lower tax expense (-38% YoY) this quarter.
Aspion. Contributed RM9m to the Group’s bottomline this quarter as opposed to the RM3m loss in 1QFY19. Aspion’s current utilization rate hovers around 55-60%. For this reason, we are more optimistic that there should be no impairments in the near term as the Group expects Aspion to perform better in 2H19. Nevertheless, Aspion is not expected to be a meaningful earnings contributor to the group in the near term.
Raw material prices for both natural rubber NR and nitrile fell in 2QFY19, with the average price of NR falling to RM3.62/kg (-4.2% QoQ) and average price of nitrile falling to USD1.08/kg (-14.3% QoQ). We expect the downward trend in NR and nitrile price to continue due to the oversupply condition in Thailand, Vietnam and Indonesia.
Issuance of convertible bonds. Following the completion of convertible bond issue on 1st of March, we will see lower finance cost going forward, given that the proceeds from the bond issue will be used to pare down the Group’s borrowings. Interest cost savings should kick in starting 3QFY19, and will effectively lower the finance cost by RM16m p.a. We expect to see c. RM8m of savings in FY19.
Outlook. From our understanding, F31 has commission 18 out of 30 lines as of current. With the expansion for F32 (3.4bn pcs), F33 (1.2bn pcs), F2B (0.8bn pcs), F5A (2.0bn pcs) and construction of F40 Phase 1 (2.2bn pcs) underway, Top Glove should have total production capacity of 70.1bn pcs at the end of CY2019.
Source: PublicInvest Research - 25 Mar 2019
