TOP GLOVE CORP BHD
Target price: RM8.20
UOB Kay Hian Research said Top Glove’s fourth quarter FY18’s core earnings fell 9% quarter-on-quarter (q-o-q) but rose 26% yearon-year (y-o-y) compared with its earlier expectations of a q-o-q improvement.
“This brought FY18 bottom line to RM448mil (+39% y-o-y), which was at the lower end of our expectations. A final dividend per share of 10 sen was declared, lifting total payout in FY18 to 17 sen,” the research house said.
It noted that the company registered a good quarterly revenue growth of 11% q-o-q in the latest fourth quarter.
The improved revenues were due to better volumes, positive average selling price revisions and forex tailwinds following the strengthening of the US dollar to the ringgit, it said.
Core earnings in the quarter that fell 9% q-o-q was due to higher raw material prices, 45% q-o-q jump in interest expense and an elevated effective tax rate of 28% compared to 11% in the previous quarter.
“With the acquisition of Aspion completed in early-April along with the completion of Factory 31 in July, Top Glove is now capable of producing up to 60.5 billion gloves per year.
“Also, management unveiled its new expansion plans (Factory 33, 5A and 8A) on top of the outstanding expansion timeline for Factory 32 (by end-2019),” it said.
“When all are fully operational by 2020, Top Glove’s manufacturing capacity will balloon to 70.3 billion gloves annually (+16%). The new lines are for nitrile gloves, which should raise capacity mix in this space to about 40% from 35% currently.
“Management intends to achieve a 50:50 nitrile-to-latex glove production split over the longer term,” the research house added.
It said that it is bearish on the stock as valuations are rich and risk-reward profile is unfavourable.
“Within our coverage, Top Glove is the second priciest proxy to the sector. Also, it is trading at more than two standard deviations to its five-year forward price-to-earnings ratio. Maintain ‘sell’ and target price of RM8.20,” it said.