‘Neutral’ calls on Top Glove despite resilient market


Analysts are remaining ‘Neutral’ on Top Glove Corp Bhd following its within-expectation results for the financial year ending Aug 31, 2017 (FY17), and its plans to expand by way of acquisitions.

Hong Leong Investment Bank Bhd (HLIB) kept its ‘Hold’ call on the glove manufacturer with a higher target price of RM5.74 from RM5.20 previously, with valuation based on a price-to-earnings (PE) ratio of 18.3 times.

“We still like Top Glove for its exposure in the resilient export market (in view of rising protectionism in global trade) and it being a benefactor of the strong US dollar,” a recent report by HLIB read.

The company’s profit after tax and minority interests for FY17 stood at RM332.4 million, in line with the research firm’s estimates.

It said effective tax rates can be expected to decrease to approximately 15% moving forward as Top Glove draws down on its tax incentives.

“With the revision in average selling price (ASP), stable US dollar and raw material prices going forward, we expect earnings before interest, tax, depreciation and amortisation margin to range between 14% to 15% in FY18,” it said.

Meanwhile, AmInvestment Bank Bhd raised its forecast for the manufacturer’s FY18 to FY20 earnings by about 3 each, as well as its fair value to RM6.36 from RM6.22, with a ‘Hold’ recommendation on the glove maker, although it noted the current share price has “very much priced in Top Glove’s fundamentals”.

AmInvestment report stated that global glove demand is expected to remain healthy with an annual growth rate of 8% to 10%, while Top Glove’s FY17 revenue is poised to rise 15% on the back of a 13% hike in output volume.

Top Glove’s net profit mar- gin is estimated to be relatively unchanged at 10% in FY18, alongside low effective tax rates at around 15% in FY18 up to FY20.

“Management highlighted that even with government withdrawal of the reinvestment allowance in 2019,  the group will be able to sustain the low effective tax rate through the availability of research and development tax incentives, utilisation of unutilised allowance and internal tax planning,” the research firm said.

MIDF Amanah Investment Bank Bhd too had revised its FY18 earnings forecast for the glove producer up by 2.7%, with the input of higher ASP due to anticipated increase in both raw materials price and new production capacities coming in FY18.

It maintained a ‘Neutral’ stance on the firm, with a revised target price of RM5.53 from RM5.15 prior. The valuation was premised on FY18 earnings per share of 28.95 sen pegged to the company’s three- year historical average PE ratio of 19.1 times.

“We opine that this is fair given that we believe all the positives have been priced in.

“Although raw materials price has slowly recovered from its peak back in February 2017, we continue to be wary of the movements of currency as well as raw materials price which could adversely impact earnings.

“We also caution on any potential delay in capacity expansion as this could disrupt revenue and earnings growth,” it said.

The glove maker recently announced that it had entered into a term sheet with YS Hoong Sdn Bhd to buy all shares of Eastern Press Sdn Bhd — a major supplier of its packaging boxes — for RM47.25 million. The proposed acquisition is expected to be completed in February 2018.

“This should improve the group’s supply chain management and could potentially result in cost savings of RM4.5 million (1% to 2% of projected FY18 earnings),” AmInvestment said.

Noting that Top Glove’s cash balance stood at RM240 million as at FY17, Hong Leong Investment said the profit guarantee of RM4.5 million for FY18 implies that the acquisition is valued at 10.5 times PE, which it deemed to be earnings accretive.

“Packaging as a percentage of total costs is circa 5% to 6%,” it added.

The glove maker also said last week that it has several acquisitions in the pipeline, including plans to acquire a Malaysia-based surgical and examination glove manufacturer for over RM1 billion.