Top Glove’s improved 1Q an indication to brighter prospects

KUCHING: Top Glove Corporation Bhd’s (Top Glove) first quarter of the financial year 2017 (1QFY17) results and performance could indicate brighter prospects for the group, analysts observed.

Kenanga Investment Bank Bhd’s research arm (Kenanga Research) in a report, highlighted that this set of quarterly results marked the second consecutive quarterly earnings improvement of which it envisaged previously.

“Most importantly the upwards continuous improvement in average selling prices is pointing towards further margins expansion in subsequent quarters.

“The slower-than- expected new incoming capacities could lead to less intense nitrile glove competition, which appears to be subsiding and could ease downwards pressure on ASPs.

“As an indication, this quarter’s higher ASPs could well indicate that price competition has abated, which should auger well for Top Glove’s earnings in subsequent quarters,” it opined.

The research team noted that due to the lag effect in passing cost through as a result of higher natural gas and raw material ( latex) costs, Top Glove had since raised ASPs, which should contain high operating costs and put brakes on further margin compression in subsequent quarters.

Meanwhile, Kenanga Research pointed out that over the next two to three quarters, Top Glove earnings are expected to be un-

Most importantly the upwards continuous improvement in average selling prices is pointing towards further margins expansion in subsequent quarters. Kenanga Research

derpinned by the just completed Factory 6 .

Beyond Factory 6, Factory 30 ( Klang), is being constructed and expected to commence production by April 2017, it added.

“Concrete plans are also in place for Factory 31 ( Klang), for which Phase 1 will commence by August 2017 with a production capacity of 1.6 billion gloves per annum and Phase 2, by May 2018, with a production capacity of 2.8 billion gloves per annum, bringing the total production capacity to 4.4 billion gloves per annum.

“By May 2018, the group will have a total of 600 production lines and a production capacity of 56.8 billion gloves per annum,” the research team said.

In another note, Affin Hwang Investment Bhd’s research arm (Affin Hwang) expect raw material prices continued to inch up along with the renewed optimism in China automotive sales, as the average latex price rose two per cent to RM4.46 per kg and the average nitrile price rose two per cent to US$ 0.98 per kg.

Meanwhile, on Top Glove’s performance, the research team noted that Top Glove booked a core net profit of RM73 million (an increase of 12 per cent quarter- on- quarter, down 43 per cent year- on-year) on the back of a firmer margin.

“The better margin was primarily driven by higher operational efficiencies after the completion of internal enhancements at several legacy plants.

“Existing operational improvement initiatives remain ongoing and when combined with the progressive commissioning of three new plants with faster production lines, we estimate that internal efforts could contribute up to 0.1 to 0.3 percentage points (ppts) to margin enhancement every quarter moving forward,” it explained.

Overall, Affin Hwang maintained a ‘ buy’ call on the stock. It said, “We like Top Glove for its changing product mix, dominance in global market share, and ongoing efficiency improvement initiatives. Strong capacity growth visibility and a high production base make Top Glove the prime beneficiary in the event of a US dollar ASP recovery.”

Similarly, Kenanga Research maintained an ‘outperform’ recommendation on the stock. It opined, “We expect improvement in sequential quarterly results going forward on the back of the sustained strength in dollar against the ringgit.”