KUALA LUMPUR, Jan 7 (Bernama) -- Bursa Malaysia’s benchmark index rebounded from earlier losses to close at its intraday high on Wednesday, gaining 0.27 per cent in late trading as buying interest returned to selected heavyweights. At 5 pm, the FTSE Bursa Malaysia KLCI (FBM KLCI) advanced 4.48 points to 1,676.83 from Tuesday’s close of 1,672.35. The benchmark index opened 0.88 of-a-point lower at 1,671.47 and subsequently hit a low of 1,665.94 during the mid-morning session before gaining momentum toward closing. On the broader market, losers led gainers by 565 to 512, while some 526 counters were unchanged, 1,046 untraded, and 10 suspended. Turnover improved to 2.73 billion units worth RM2.76 billion versus Tuesday’s 2.66 billion units worth RM2.76 billion. Dealers said that investors were cautious following geopolitical developments in Asia.
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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