Signs of slowing down for Top Glove’s 2Q19 results

KUCHING: Normalising demand, swelling capacities and intensifying competition are all signs pointing towards a slower set of sequential second quarter of 2019 (2Q19) results for Top Glove Corporation Bhd (Top Glove).

In a company update report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) anticipated for the rubber glove manufacturer’s core 2Q19 profit after tax and minority interest (PATAMI) to come in lower sequentially from the RM110.1 million seen in 1Q19.

“Due to normalising demand as delivery lead times have shortened, competitive pressure, and margins pressure emanating from the appreciation of ringgit against the US dollar,” said the report.

Additionally, the research arm reported that from their channel checks, they gather that competition in the nitrile gloves segment has intensified, leading to pressures on average selling prices (ASPs).

“We understand that over the past six months, delivery lead times, the time frame between order and delivery, have shortened from 60-70 days compared to 30-45 days, potentially indicating that strong demand is tapering off.

“As such, coupled with the moderating demand and in anticipation of new capacities ramp- ups, we would not be surprised if ASPs come under further pressure over the next two quarters,” detailed the research arm who added that rubber glove ASPs have generally risen by an average of 25 per cent since the end of 2016.

Assuming if ASP is quarter over quarter (q-o-q) lower by 4 per cent but sales volume is up by 4 per cent, the research arm estimates that the group’s 2Q19 PATAMI to be one per cent lower q-o-q at RM109 million.

“(This) will bring 1H19 PATAMI to RM219 million or 45 to 43 per cent of ours and consensus fullyear forecasts.

“We consider such results to be below expectations as we expect subsequent quarters results to be muted down by normalising demand, swelling capacities and intensified competition and hence ASPs pressure,” said the report.

Looking ahead, Top Glove is currently in the process of constructing several manufacturing facilities – Factory 32, Factory 33, Factory 5A, Factory F40, Factory 42 and Factory 8A. It is estimated that these facilities will boost the group’s total production capacity by 14.8 billion gloves per annum or 19.6 per cent to 75.3 billion.

All things considered, the mounting competition and pressure on the ASPs have prompted Kenanga Research to cut their FY19-20 forecasts by 5 and 4 per cent.

Maintaining an underperform call, the research arm downgrades their target price from RM4.45 to RM4.20.

“Apart from the lukewarm prospects over the short- tomedium term, we believe the irregularities discovered at Aspion could take longer-thanexpected to recover. A key upside risk to our call is the higher-thanexpected sales volume,” justified the research arm.