TOP GLOVE CORP BHD

By AmInvestment Bank Research Hold (maintained) Fair Value: RM6.22

AMINVESTMENT Bank Research expects Top Glove’s revenue to grow by 16% in FY18, underpinned by a 13% increase in production volume.

It said the glovemaker’s production capacity is set to expand by 11% from 48 billion in FY17 to 53 billion pieces in FY18 on the back of contribution from four new factories.

The research house said global glove demand growth was anticipated to be healthy at 6%-8% per annum due to the emergence of new health threats and increasing hygiene standards and healthcare awareness.

The research house expects Top Glove’s earnings before interest, tax, depreciation and amortisation margin to be relatively unchanged at 14% in FY18.

“We believe that selling prices would be stable in line with the costs of nitrile and latex.

“If the costs of raw materials rise, Top Glove would be able to pass on 70% to 80% of the costs in the form of higher selling prices.

“It takes about one to two months to adjust the selling prices,” it said in a note.

Nitrile and latex account for about 50% of Top Glove’s production costs.

The research house expects earnings risk to come from the proposed increase in foreign worker levy from RM1,200 to RM1,800 per worker, which Top Glove may have to absorb.

This is expected to take place in the beginning of 2018.

Top Glove currently employs 7,000 foreign workers.

AmInvestment Bank Research said the levy for foreign workers could reduce Top Glove’s FY18 net profit by between 3% and 4%.

Meanwhile, it said the recent acquisition of two factories in Nilai and Muar would boost Top Glove’s presence in China while the addition of three new manufacturing facilities in Klang will improve its nitrile capacity.

“This would help Top Glove achieve a more balanced product mix, consistent with global demand,” it said.

It added that the management was confident that Top Glove would be able to increase its global market share from 25% to 30% by 2020 via its expansion strategy.