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Thursday, October 13, 2016

Brokers Report: Top Glove Corporation Berhad - Flattish Quarter



Retain Neutral call with lower target price (TP) of RM4.62


Top Glove’s FY16 results missed our and consensus estimates, making up only 93.0% and 95.9% full-year numbers respectively. FY16 revenue me in at RM2.9bn (+15.1% YoY), with earnings at RM361.1m (+28.9% YoY), mainly helped by the exceptionally high earnings in 1HFY16 on the back of a stronger USD and lower raw material prices. We are cautious on the group’s near term outlook owing to the absence of a USD-driven catalyst, mounting st pressures and persistent price competition. Our earnings estimates are lowered by 14.3% to 34.7% for FY17 onwards, accounting for adjustments to capacity projection, lower ASP assumption and higher operating costs. We maintain our Neutral call with a lower TP of RM4.62 based on a DCF valuation methodology. An 8.5 sen dividend was proposed this quarter, which translates into full year dividend yield of 2.9%.
  • Flattish QoQ. 4QFY16 revenue was RM722.1m (+7.4% QoQ, +1.8% YoY), with earnings at RM65.6m (+5.1% QoQ, -36.3% YoY). The QoQ increment came from a hike in ASP (6%-8% QoQ) and lower raw material prices (-3% QoQ), though partly offset the higher operating costs incurred in this quarter. Mounting st pressures are largely due to higher labour costs (+11%) from implementation of the minimum wage policy and the recent hike in natural gas prices (+6%).
  • Expansion updates. F27 in Lukut with 2.0bn pcs/annum capacity has been completed and commenced gradually since August 2016. It is targeted to be fully commercialized by December 2016. F6 in Phuket is delayed for another four months to December 2016, due to its construction design issues however. Construction of F30 has begun and is expected to be operational by April 2017 (previously targeted by February 2017). In addition, the group targets to further expand by an additional 6bn pcs/annum capacity through the recently- acquired factory in Klang, under two phases. We anticipate a slight slow- down in its expansion plans however given the prolonged pricing competition environment. We have not imputed the additional 6.0bn capacity into our capacity projection until further clarity from management.
  • Neutral ll. Our earnings estimates are lowered by 14.3%-34.7% for FY17 onwards, to account for lower ASP assumption, higher operating costs and adjustments to our capacity projection. As a result, our target price is lowered to RM4.62 (previously RM5.52). We are cautious on the group’s near term outlook owing to the absence of a USD-driven catalyst, mounting st pressures and persistent price competition.

Source: PublicInvest Research - 13 Oct 2016

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