Top Glove records solid 9M18, strong demand from emerging markets
KUCHING: Top Glove Corporation Bhd ( Top Glove) recorded a solid first nine months of 2018 ( 9M18), driven mainly by market- share gains and improving demand from emerging countries.
In a report, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital) saw that Top Glove’s 9MFY18 profit after tax, and minority interest ( PATAMI) of RM332 million (up 42 per cent year- on-year) came in within expectations.
“The strong earnings growth is mainly driven from its existing operations (ex-Aspion), with sales volumes up by 25 per cent yearon-year ( y- o-y) as the company benefits from the current robust demand, coupled with a lower effective tax rate of 12 per cent,” it highlighted.
However, it believed that the disruptions in the vinyl glove supply chain has helped to speed up the switch from vinyl gloves to latex-based gloves for end-users, due to the narrowed price gap and certainty in glove supply.
“Although the increasing supply of vinyl gloves from China in June 2018 has widened the average selling price (ASP) gap between vinyl and latex gloves, the current price gap still justifies the switch,” the research team explained.
Meanwhile, it noted that Top Glove’s Aspion acquisition was completed in early April, and based on a profit guarantee for FY18E of RM80 million.
The acquisition should be contributing around RM6.6 million per month, it said, but the contribution in the third quarter of the financial year 2018 (3QFY18) was only RM7 million.
“Management has guided that Top Glove will need more time to reap the full benefits from the deal; however, the current shortfall will be covered by the vendor.
“Any impairment on the goodwill would only likely happen after year three, if any, when the guarantee has expired. In the meantime, Top Glove earnings growth is supported by its current capacity growth.”
On Top Glove’s prospects, the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) said, Top Glove should see an increase of 11 per cent in its production capacity following the completion of its two new manufacturing facilities; Factory 31 (operational by July 2018), and Factory 32 (operational by early 2019).
It explained that the two factories should boost Top Glove’s total number of production lines by an additional 74 lines and production capacity by 7.4 billion gloves per annum.
Aside from that, the research team pointed out that preparations for Top Glove’s condom manufacturing facility have also commenced and expected to be operational by June 2018.
All in, Kenanga Research pegged a ‘ underperform’ rating on the stock as it believed that the positives have been priced in.
Affin Hwang Capital-maintained its ‘buy’ call, stating “We believe that Top Glove’s high utilisation rate provides a positive readthrough for its peers, demonstrating that demand for rubber gloves remains robust.”