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Maintain buy with a lower target price (TP) of RM6.50
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| Top Glove |
Remains the industry’s most profitable player
2QFY8/16 results were sequentially weaker but still solid, being Top Glove’s historically second most profitable quarter. For 3QFY8/16, we think earnings could be flattish QoQ as sales volume growth could compensate for the stronger MYR/USD and higher latex cost. We maintain our earnings forecasts and BUY call. However, given the volatility in external factors, we lower our target 2017 PER to 19x (+1SD to mean PER, from 25x) to derive our new TP of MYR6.50 (-22%).
Within expectations
2QFY8/16 core net profit was MYR105m (-15% QoQ, +87% YoY), bringing 6MFY8/16 core net profit to MYR228m (+118% YoY) - 57% of our and street’s full-year forecasts. The comparative preceeding quarter’s core net profit excludes gains from the disposal of US bonds. No dividend was declared, as expected.
Seasonally weaker; Margins remained strong
The weaker QoQ earnings was due lower revenue (-13% QoQ) as: (i) sales volume was seasonally softer (-3% QoQ); and (ii) ASPs were adjusted lower (-11% QoQ) to reflect the savings in USD/rubber price.
Nevertheless, its EBITDA margin remained strong at 22% (-0.4-ppt QoQ), due mainly to improved operational efficiency. Moreover, the gross margin for latex gloves (Top Glove’s key segment) has been stable at 23- 24%, compared to the contraction in margin for nitrile gloves (1-2-ppt QoQ), a result of rising nitrile glove competition.
3QFY8/16: Earnings to be flattish QoQ?
While USD/MYR has weakened 3% to 4.13 presently (from average 4.27 in 2QFY8/16) and latex cost has risen 16% to MYR4.11/kg (40% of latex glove production cost), we think the drag could be compensated by sales volume growth in 3QFY8/16. Traditionally, Top Glove’s 3Q sales volume had expanded 6-9% QoQ in FY8/12-15. Hence, we believe its 3QFY8/16 earnings could be flattish QoQ (but still a double-digit growth YoY). We maintain our EPS forecasts, which have imputed a softer 2HFY8/16.
Source: Maybank IB Research, 17 March 2016
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